Bollinger Bands, Drawn Out

The line down the middle of a Bollinger setup is called the basis, and it's just a simple moving average. Add up the last 20 closes, divide by 20. That's the whole thing.

What a moving average does is summarize, not predict. It steps back from the bar-to-bar noise and answers one question: roughly where has price been over the last twenty bars? That's it. The average itself says nothing about what happens next — it compresses the past.

A moving average moves because the stretch of bars it averages shifts forward by one every time a new bar arrives — the newest close joins, the oldest drops out. In the chart below, the shaded region is the 20 bars currently being averaged, and the violet dot is what they average to.

Notice the basis doesn't start at the left edge. Averaging 20 bars requires 20 bars, so for the first 19 there's simply no value to plot. Every indicator has this warm-up, and it's why the opening stretch of a backtest often looks empty.

If you want moving averages themselves in more depth — how SMA and EMA differ, how period controls lag, what a golden cross actually is — the Moving Averages lesson picks up from here.

If the basis tells you roughly where price has been, the bands tell you how spread out it was getting there. Take the same 20 closes, compute their standard deviation, and place a line two of those deviations above the basis and another two below. Those are the upper and lower bands.

Standard deviation measures how far from the average those closes typically sat. When the last 20 bars have been grinding in a narrow range, it shrinks and the bands pull in tight against the basis. When price has been swinging, it grows and the bands flare out.

A Bollinger setup has exactly two knobs: the period (how many bars go into the average) and the multiplier (how many standard deviations out to place the bands). Moving them yourself beats reading about them.

One thing worth feeling here: push the multiplier to 3.0 and price almost stops leaving the envelope at all. That hasn't made anything more accurate — it has just loosened the definition. Changing a parameter doesn't change the market, it changes what you've decided to call unusual.

The width of the envelope can be read as a number in its own right: the gap between the bands divided by the basis, as a percentage, so it stays comparable across price levels. Stretches where that number gets unusually low are commonly called a squeeze.

In this window, bandwidth fell to 0.97% on 16 August 2026 — the last 20 bars had barely moved. Thirty bars later it had reached 26.56%, roughly 27 times wider.

%B turns price's position inside the envelope into a single number between 0 and 1. At 0 it's sitting exactly on the lower band, at 1 exactly on the upper, and 0.5 is the basis. Above 1 means price closed outside the upper band; below 0, outside the lower one.

Its usefulness is simple: it makes "price touched the band" something you can measure rather than something you eyeball.

That eight-bar run matters. If you'd been reading an upper-band touch as "overbought, expect a pullback," this stretch would have told you that eight times in a row, and been wrong each time. In a strong trend, price walking the upper band is ordinary behavior, not an anomaly.

Probably the most important thing to understand about Bollinger Bands: the very same upper-band break is an entry signal in one strategy and an exit signal in another.

Read as a breakout, clearing the upper band means a trend is starting. Read as mean-reversion, that identical event means price has stretched too far. Toggle between the two readings below, on identical data.

The indicator doesn't tell you which reading is right. Breakout readings tend to suit stretches where trends persist; mean-reversion readings tend to suit stretches where price oscillates in a range. Which regime you're in is reliably obvious only afterwards.

That's why both exist as separate templates in the 5PM Worker Simulator — not because one is better, but because which one fits your asset on your timeframe is something you have to actually backtest to find out.

Everything above shows up in two of the Simulator's built-in templates. Both use the same formula demonstrated on this page, and both can be backtested against real candle data for whichever exchange, symbol and timeframe you care about.

If you want to compare period and multiplier settings rather than guess at them, the Sweep tool runs a real backtest for every combination across the ranges you pick and ranks the results. All of that runs on public market data — no API key and no funds involved.