Bollinger Bands: position inside a volatility envelope

Bollinger Bands are a 20-day simple moving average with an upper and lower band drawn two standard deviations away. Because standard deviation is recalculated on the same rolling window, the bands widen when the stock becomes volatile and contract when it calms down.

So the bands are not fixed rails. They are a self-adjusting envelope that describes what counts as a normal-sized move for this stock, right now.

With two standard deviations, price spends most of its time inside the bands by construction — that is what the statistic is. Touching the upper band means the move is large relative to recent volatility, not that it is over.

In strong trends price will 'ride the band', hugging the upper edge for weeks. Anyone reading each touch as an exhaustion signal spends that entire stretch being wrong. The squeeze is the more distinctive pattern: unusually narrow bands indicate compressed volatility, which historically resolves into a larger move — though the bands say nothing about which direction it will resolve in.

Rather than asking whether price touched a band, the calculation converts position into a percentage: where does price sit between the lower band (0%) and upper band (100%)? Only readings above 95% or below 5% score at all.

This is a stricter test than a band touch and gives a stable, comparable number across stocks with very different volatility profiles. Everything between 5% and 95% scores zero — which, again, is most of the time.