What Are Bollinger Bands? How to Read the Squeeze, %B and BandWidth (With Examples)

Author: Crypffalo Research · 00:57 13/10/2026

Bollinger Bands measure volatility rather than signal trades. Learn how the (20, 2) bands are calculated, how to read %B, BandWidth and the squeeze, with three worked examples.

What Are Bollinger Bands? How to Read the Squeeze, %B and BandWidth (With Examples)

Many new traders see price tag the upper Bollinger Band and assume a top is in. In practice, during a strong rally Bitcoin can hug the upper band for days without reversing.

This guide explains what Bollinger Bands are, how each band is calculated, and how to read the two companion indicators, %B and BandWidth. It includes three worked examples with concrete numbers and a five-step process for using the tool in the right context.

Key takeaways

Structure: The middle band is a 20-period simple moving average, with upper and lower bands set 2 standard deviations away.
Main purpose: Bollinger Bands measure volatility; on their own they are not buy or sell signals.
%B: Shows where price sits within the bands, with 1 at the upper band and 0 at the lower band.
Squeeze: A multi-month low in BandWidth often precedes a sharp move, but it does not tell you the direction.
Safer use: Combine the bands with trend, volume and position sizing, and never trade a band touch by itself.

1. What are Bollinger Bands and how are they calculated?

Bollinger Bands were developed by analyst John Bollinger in the 1980s. The tool draws three lines around price that contract when markets are quiet and widen when volatility picks up.

The default setting is (20, 2), calculated as follows:

Middle band: A 20-period SMA, the average closing price of the last 20 candles.
Standard deviation (σ): Measures how widely those 20 closes are spread around the SMA.
Upper band: 20-period SMA + 2 × σ.
Lower band: 20-period SMA − 2 × σ.

StockCharts suggests (50, 2.1) for longer timeframes and (10, 1.9) for shorter ones. Beginners are better off keeping the (20, 2) default so their readings match most references.

2. %B and BandWidth: the two numbers that matter

Reading the bands by eye can be misleading, so John Bollinger added two indicators that turn them into numbers.

%B = (Price − Lower band) / (Upper band − Lower band). Above 1 means price closed above the upper band; below 0 means it closed under the lower band.
BandWidth (%) = (Upper band − Lower band) / Middle band × 100. The smaller the number, the tighter the market is coiled.

Example 1 (hypothetical numbers), calculating %B and BandWidth:

20-period SMA = $80,000 and standard deviation σ = $1,500.
Upper band = 80,000 + 2 × 1,500 = $83,000.
Lower band = 80,000 − 2 × 1,500 = $77,000.
Close at $82,400 → %B = (82,400 − 77,000) / 6,000 = 5,400 / 6,000 = 0.90.
BandWidth = 6,000 / 80,000 × 100 = 7.5%.

Example 1: calculating %B and BandWidth (hypothetical data)

A %B of 0.90 only tells you price is near the upper band. It says nothing about an imminent drop until you put it in the context of the trend.

3. How to read the signals: squeeze, walking the bands and W-bottoms

Three setups come up most often when reading Bollinger Bands. Each one needs a different interpretation.

Squeeze: The bands pinch together and BandWidth drops to a multi-month low. Low volatility rarely lasts, so this is the time to prepare for a strong move.
Walking the bands: In a strong uptrend, price repeatedly tags the upper band. StockCharts stresses these are tags, not sell signals.
W-bottom: The second low undercuts the first but holds above the lower band, then price rallies through the middle band. It suggests selling pressure is fading.

Example 2 (hypothetical price series in the charts), reading a squeeze:

BandWidth falls from about 6.2% to 1.71% at candle 50, with the bands almost touching.
Candle 52 closes at 81,676, above the upper band at 81,321, giving a %B of 1.20.
Price then walks the upper band while BandWidth expands to roughly 20%.

Bollinger Bands (20, 2): a squeeze, a breakout, then price walking the upper band (hypothetical data)

BandWidth bottoms at 1.71% before expanding to about 20% (hypothetical data)

The key point: a squeeze signals a big move, not its direction. In crypto, the first break out of a squeeze is sometimes a fakeout before price runs the other way.

4. Common mistakes with Bollinger Bands

Most losses with this tool come from misunderstanding a few basics.

Selling just because price hit the upper band: In an uptrend this usually signals strength, not a reversal.
Buying every lower-band touch: In a downtrend, price can slide along the lower band for many sessions.
Guessing direction during a squeeze: Wait for a close outside the band with rising volume; see our guide to volume and breakouts.
Using the bands alone: Pair them with a different type of indicator such as RSI or the 20/50/200 EMAs.
Reading very low timeframes: On 1- to 5-minute charts the bands widen and narrow constantly and throw off false signals.

5. A five-step process for applying Bollinger Bands

This process helps you use the bands with discipline instead of reacting to every band touch.

Step 1: Define the context on a higher timeframe: is the market ranging or trending?
Step 2: Check BandWidth to see whether it sits near a multi-month low (a squeeze).
Step 3: Wait for a candle to close outside the band, with above-average volume and no nearby resistance; see support and resistance.
Step 4: Place the stop on the other side of the middle band, where the breakout idea is proven wrong.
Step 5: Size the position with the 1–2% risk management rule.

Example 3 (hypothetical numbers), sizing a position by risk:

A $10,000 account risking 1% → a maximum loss of $100 per trade.
The reference price is candle 52's close at $81,676, with the middle band near $80,414.
A hypothetical stop at $80,400 → a stop distance of $1,276.
Position size = 100 / 1,276 ≈ 0.0784 BTC, or about $6,400 in notional value.

If the middle band sits far from price, the wider stop automatically shrinks the position. That keeps risk capped at 1% even when volatility is high.

What it means for crypto markets

According to CoinDesk on Oct 12, Bitcoin pulled back from the $84,000 area and is trading around $83,000 as the dollar strengthens. When price drifts sideways ahead of a macro event such as the U.S. CPI report on Oct 14, BandWidth tends to contract.

When the bands narrow before an event: Prepare scenarios for both directions instead of trying to call the move.
When the bands widen after the news: Watch whether price walks the band or slips back inside it, to separate a real trend from a stop hunt.

In a highly leveraged market like crypto, volatility spikes often come with waves of liquidations. Use the economic calendar and real-time liquidations pages to put Bollinger Bands in context.

Frequently Asked Questions

What are the best Bollinger Bands settings for crypto trading?

The default (20, 2) is a sensible starting point on most timeframes. Only adjust it after testing on historical data for the specific coin and timeframe you trade.

Is touching the upper Bollinger Band a sell signal?

No. A tag of the upper band only shows price is strong relative to the last 20 candles, and in an uptrend price can walk the upper band for days.

What is a Bollinger Band squeeze?

A squeeze is when the bands pinch together and BandWidth hits a multi-month low, showing volatility is unusually compressed. It often comes before a sharp move but does not tell you whether price will break up or down.

*This content is for information only and is not financial advice.*

Tags: Bollinger Bands, Technical Analysis, Squeeze, Indicators

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