Bollinger Bands

What are Bollinger Bands?

Developed by John Bollinger in the 1980s, Bollinger Bands are a highly popular technical analysis tool used to measure market volatility and identify overbought or oversold conditions. The indicator consists of three lines: a simple moving average (SMA) in the middle, and an upper and lower band that react to price volatility.

When the market becomes volatile, the bands widen. When the market is quiet, the bands contract.

The Mathematical Formula

Unlike basic indicators, Bollinger Bands rely on standard deviation to adjust dynamically to market conditions. The standard default settings use a 20-period SMA and 2 standard deviations.

Middle Band: 20-day Simple Moving Average (SMA)
Upper Band: 20-day SMA + (20-day Standard Deviation × 2)
Lower Band: 20-day SMA - (20-day Standard Deviation × 2)

Note: In statistics, placing bands at 2 standard deviations ensures that approximately 95% of all price action occurs between the two bands.*

Algorithmic Trading Applications

In MQL5 and automated trading systems, Bollinger Bands are frequently used to build two specific types of robots: 1. Mean Reversion (Reversal) Bots: Since 95% of prices stay within the bands, an algorithm can be programmed to execute a "Sell" order when the price pierces the Upper Band, and a "Buy" order when it pierces the Lower Band, expecting the price to revert to the Middle Band (SMA). 2. The Squeeze (Breakout) Bots: When volatility drops significantly, the bands contract tightly together (The Squeeze). Quants program algorithms to detect this contraction and place pending breakout orders, anticipating a massive surge in volatility and a strong new trend.