What Are Bollinger Bands?
Bollinger Bands are a volatility indicator created by John Bollinger. They consist of three lines: a simple moving average (typically 20 periods) in the middle, an upper band at +2 standard deviations, and a lower band at -2 standard deviations. The bands expand and contract based on price volatility.
How Bollinger Bands Work
When volatility increases, the bands widen. When volatility decreases, they narrow — creating a "squeeze" that often precedes significant price moves. Price touching or exceeding the upper band suggests overbought conditions, while touching the lower band suggests oversold conditions. The bandwidth (distance between bands) itself is a valuable volatility metric.
Why It Matters for Traders
Bollinger Band squeezes are one of the most reliable volatility breakout signals in crypto. When the bands compress to unusually narrow levels, a large directional move typically follows. Traders use this to time entries and set stop-losses, combining Bollinger Bands with volume confirmation to filter false breakouts.
How Perps Traders Use This
For CEX perpetual futures, treat bollinger bands as context around entries, exits, and risk, not as a standalone signal. Pair it with funding, open interest, and liquidation heat so one indicator does not drive the whole book.
Formula and Worked Example
Example numbers only (not a live quote).
If your account equity is $10,000 and you risk 0.5% per idea, the cash risk budget is $50. With a stop 1% away from entry on a linear USDT-margined perp, notional size is about $5,000 before leverage optics. Size from stop distance first, then pick leverage that fits the margin mode.
Common Mistakes
- Treating a single print of bollinger bands as a trade signal without checking funding, open interest, and your liquidation price.
- Mixing venue conventions (coin-margined vs USDT-margined, cross vs isolated) and reading the wrong mark.
- Copying example numbers from a glossary into live size without checking the current book depth and fee schedule.
- Ignoring related terms that change the meaning of the print on a given day.
