Bollinger Bands
Bollinger Bands consist of a simple moving average flanked by upper and lower bands set two standard deviations above and below the SMA. They expand during periods of high volatility and contract during low-volatility periods, providing a dynamic range context for price movement on Nifty and Bank Nifty charts.
Developed by John Bollinger, the indicator uses a 20-period SMA as the middle band, with the upper and lower bands computed by adding and subtracting two standard deviations of price from the SMA. The two-standard-deviation setting means that, under a normal distribution assumption, approximately 95% of price closes would be expected to fall within the bands. In practice, financial markets are not normally distributed, so deviations from this expectation are common.
Bollinger Band width — the distance between the upper and lower bands — is a measure of recent price volatility. When the bands were very narrow (a squeeze), it indicated that Nifty or Bank Nifty had been trading in a compressed range with low volatility. Historically, periods of compression were sometimes followed by sharp expansionary moves, though the direction of the breakout was not signalled by the bands themselves.
The bands were used as a reference for assessing the relative position of price within the recent volatility range. A close at the upper band indicated that the price was at the high end of the recent two-standard-deviation range — which could reflect strong momentum or, in some interpretations, a stretched condition. A close at the lower band reflected the opposite. Neither position alone constituted a signal without additional context.
In choppy, range-bound markets observed historically in Nifty, price frequently walked along the upper or lower Bollinger Band during trending phases. The common misconception that touching the upper band is a signal to dispose or the lower band is a signal to acquire has been systematically tested and found to be unreliable in trending environments. The bands are most useful as a volatility measurement tool, not as standalone reversal signals.
Bollinger Bands can be customised by adjusting the SMA period and the standard deviation multiplier. A tighter setting (e.g., 1.5 standard deviations) results in more frequent touches of the bands; a wider setting (e.g., 2.5 standard deviations) results in fewer. The standard 20-period, 2-standard-deviation setting is the most widely used because it became the convention established by Bollinger himself.