Learn the stock market › Indicators › Lesson 3 of 7
What are Bollinger Bands?
Costco with Bollinger Bands
Price20-day averageUpper bandLower band
How they are worked out
The middle line is a simple average of the last 20 closing prices. The standard deviation measures how far prices tended to sit from that average over the same days. The bands sit two standard deviations above and below.
Here it is for Costco.
The standard deviation: 29.28
Upper band: 1,003.34 + 2 × 29.28 = 1,061.91
Lower band: 1,003.34 − 2 × 29.28 = 944.78
The method comes from John Bollinger, and 20 days and two standard deviations are his usual settings. Because the width follows the price's moves, a dollar outside the band means more on a calm stock than on a jumpy one.
How often does the price close outside?
Among the 20 largest US companies since 2000, the stock closed over the upper band on 7.3% of days and under the lower band on 4.8%. The day after a close over the band, the price was still over it in 51% of cases. A price can also ride the band for a long time: Nvidia closed over the upper band for 10 days in a row, up to Jan 13, 2011.
What happened after a close outside?
This is the same test as in the lesson on RSI: the first close outside a band, at most one a month per company, against the same company's ordinary day.
| After three months | Under the lower band | Over the upper band | Ordinary day |
|---|---|---|---|
| Times | 1,725 | 2,281 | – |
| Had risen | 66.4% | 63.1% | 64.4% |
| On average | +6.8% | +5.8% | +6.3% |
Under the lower band, the stock had risen in 66.4% of cases after three months, and over the upper band in 63.1%, against 64.4% on an ordinary day. The differences in average rise can't be told apart from chance, after one, three or twelve months.
These are today's largest companies, so they recovered from every fall. That flatters the days under the band.
Do big moves follow narrow bands?
It is often said that narrow bands, a so-called squeeze, come before a big move. We counted days when the width was its smallest in a year, 493 times. In the month after, the price moved 7.3% on average, up or down. An ordinary month for the same companies was 7.5%.
That difference can't be told apart from chance. Narrow bands show that the price has stood still, not that it is about to move more than usual.
What the bands say, and what they don't
The bands describe how the price moved over the last 20 days. They don't say why, and nothing about how the company is valued. ATR measures the size of moves in a similar spirit, using each day's high and low.
Test yourself
A stock closes over the upper band. What do you know for certain?
More numbers are on the Costco stock page.
Sources
- StockCharts ChartSchool, Bollinger Bands: who developed them, the calculation and the registered trademark of John Bollinger, read on 5 November 2026.