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Intermediate · Lesson 6 of 9

Bollinger Bands, volatility and ATR

6 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Bollinger Bands, created by John Bollinger, plot a 20-period moving average with bands two standard deviations above and below. Bands widen when volatility rises and narrow when it falls. A "squeeze" (very narrow bands) often comes before a big move, though not its direction.

Average True Range (ATR), another Wilder tool, measures the average daily range including gaps. Traders use ATR to set stop-losses that respect normal noise, for example 2 x ATR below the entry, and to size positions so each trade risks a similar dollar amount.

Volatility is not constant: it clusters. Calm periods tend to follow calm, and turbulent periods follow turbulent. This is one reason to size positions by volatility rather than by a fixed dollar amount.

Key takeaways

  • Bands = 20-day average ± 2 standard deviations.
  • A squeeze signals a coming move, not its direction.
  • Use ATR to set stops and size positions.

Check your understanding

1. Very narrow Bollinger Bands usually mean...

  • High volatility now
  • Low volatility, often before a larger move
  • The share will rise
  • The share will fall
Show the answer

Low volatility, often before a larger move. Squeezes precede expansions but not a direction.

2. Why size positions by ATR?

  • To trade more often
  • So each trade risks a similar amount despite different volatility
  • To avoid tax
  • ATR predicts dividends
Show the answer

So each trade risks a similar amount despite different volatility. Volatile shares get smaller positions.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.