Bollinger Bands on a Live Gold Chart

What it shows

Three lines over the candles: the basis in the middle, the upper band and the lower band. The gap between upper and lower is the width. It grows after big moves and shrinks in quiet stretches.

How Pravex works it out

1. Basis: the moving average of the source over Length, using the type you pick. The default is a simple average.
2. Spread: the standard deviation of the source over the same Length, the population kind (divide by Length). It is measured around the plain average of the window, even when the basis uses another average type.
3. Upper band = basis + width × spread. Lower band = basis − width × spread, where width is the standard-deviation setting, 2 by default.
4. Offset then slides all three lines to the right for a positive number and to the left for a negative one, by that many candles.

Settings

Setting	Default	What changing it does
Length	20	How many candles feed both the basis and the spread. A shorter Length makes the bands react quicker and hug price more.
Middle line average	SMA	The kind of average used for the middle line: SMA, EMA, SMMA (RMA), WMA or VWMA. A VWMA middle line has no volume to weight by on spot gold, so it is only useful on markets like bitcoin.
Source	close	The price both the average and the spread are taken from.
Band width in standard deviations	2	How many spreads the bands sit from the basis. A larger number gives wider bands that price touches less often.
Offset	0	Moves the whole set of lines that many candles right (positive) or left (negative). It only changes where the lines are drawn, not their values.

How traders read it

The squeeze comes first. When the bands pull in tight after a long stretch of quiet, the market has been moving very little. John Bollinger’s own reading is that a squeeze tends to come before a bigger move, though the bands do not say which way. A close outside one band is what shows the direction.

The second is the walk. In a strong trend, closes sit near or past one band for many candles while the basis climbs or falls underneath. A touch of the band is then a sign of strength, not an automatic turn.

Inside a range, the bands act as a rough frame: price bounces between them and the basis. That reading fails the moment the range breaks, so watch the width as well as the touches.

When it misleads

The two-deviation number comes from statistics for bell-shaped data, and price is not bell-shaped. The often-quoted idea that about 95% of closes stay inside assumes that spread, so do not count on any fixed share. A touch alone is not a signal; in a trend it is the normal state. Width also lags, since it is built from the last Length closes, so a squeeze can sit tight for a long time without anything following. When the basis is not an SMA, the bands are still centred on the SMA-based spread, so they are not perfectly symmetric statistically.

Questions and answers

How are Bollinger Bands calculated?

A moving average over Length gives the middle line. The standard deviation of the same candles, times the width setting, is added to it for the upper band and subtracted for the lower one.

How often does gold close outside the bands?

There is no fixed share. The bell-curve figure of about 5% assumes moves spread evenly, and price moves come in bursts, so in a strong run closes can sit past one band for many candles. A width of 2.5 instead of 2 puts the bands further out and cuts the touches.

What does the Bollinger squeeze mean?

It means the bands are unusually close together, so the last Length closes have been tightly grouped. It tells you volatility has been low, not which way the next move will go.

Why does an EMA middle line make the bands look lopsided?

The spread is always measured around the plain average of the window. With an EMA basis the bands are centred on the EMA but sized from the SMA’s spread, so in a fast move they can look a little off balance.

Related: Keltner Channels, Envelope, Donchian Channels, Average True Range, every indicator.