Trading Glossary
Bollinger Bands are three lines plotted on a price chart: a moving average in the middle, and an upper and lower band set a fixed number of standard deviations away from it. As a stock gets more volatile, the bands widen. As it calms down, they narrow.
The middle band is typically a 20-period simple moving average. The upper and lower bands sit two standard deviations above and below that average, though some traders adjust the period or the multiplier for a specific stock or timeframe. Because standard deviation measures how spread out recent prices have been, the bands stretch and contract automatically as volatility changes, without needing to be redrawn by hand.
Two numbers are usually calculated from the bands themselves. %B answers "where is price relative to the bands right now," expressed as a value where 0 means price is sitting on the lower band and 1 means it's sitting on the upper band, with numbers above 1 or below 0 meaning price has pushed outside the bands entirely. Bandwidth answers a different question: "how wide are the bands relative to the middle band," which is really just a direct read on how much volatility the market is currently pricing into the stock.
When bandwidth contracts to an unusually tight range, traders call it a squeeze. It doesn't predict which direction a stock will break, only that volatility has compressed and historically tends to expand again. A squeeze followed by a move outside the bands is one of the more commonly watched setups in technical analysis, precisely because contraction and expansion tend to alternate rather than volatility staying flat forever.
Some traders treat a touch of the upper or lower band as a sign a move is stretched and due to revert toward the middle average. Others treat a squeeze as a setup to watch for an upcoming breakout, without assuming direction in advance. Neither read is a signal on its own, both are usually combined with volume, trend direction, or another indicator before a trader acts on it.