What it is
Bollinger Bands, developed by John Bollinger in the early 1980s, wrap a moving average in a volatility envelope. The middle band is usually a 20-period simple moving average, and the outer bands sit a chosen number of standard deviations, conventionally two, above and below it, computed from the same 20 closes. Because the deviation is measured on a rolling window, the envelope widens automatically when the market becomes volatile and contracts when it goes quiet.
How it works
Two derived series do most of the analytical work. Bandwidth, (upper - lower) / middle, expresses the envelope as a percentage of price and makes volatility comparable across instruments and across time. Percent b, (price - lower) / (upper - lower), locates the close inside the channel: 1.0 is the upper band, 0.5 the average, 0 the lower band, and readings outside that range mean price closed beyond the envelope.
How traders use it
The most durable use is the squeeze. An unusually low bandwidth reading marks compressed volatility, and volatility is strongly mean reverting, so quiet periods tend to be followed by expansion. The bands say nothing about which direction the expansion takes, which is why squeeze setups are normally paired with a breakout rule or a structural bias. In a clearly range-bound market the outer bands also serve as reversion reference points, and in a strong trend price will walk the band, hugging it for many bars in a row.
Where it breaks down
The usual misreading is statistical. People repeat that roughly 95 percent of observations should fall inside two standard deviations and then treat a band touch as a rare event. That figure assumes normally distributed, independent observations. Financial returns are fat-tailed and serially dependent, and the deviation here is estimated from the same small window it is describing, so excursions beyond the bands are far more frequent than the normal approximation implies. A touch of the upper band is a statement about recent volatility, not a sell signal.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.