Bollinger Bands - BB

What

Bollinger Bands are a tool used in technical analysis of securities prices. Bollinger Bands are curves plotted in and around the price structure that define whether price is high or low relative to previous trades. A measure of volatility is used to set the width of the bands making them fully adaptive to changing market conditions. The defaults are bands spread above and below a 20-day simple moving average by two standard deviations.

How

Middle BB (red) = 20 day simple moving average

Upper BB (blue) = middle BB +2, 20 day moving standard deviation of the close

Lower BB (blue) = middle BB – 2, 20 day moving standard deviation of the close

When

Bollinger Bands can be used to aid chart pattern recognition. They can be combined with other indicators to identify entry & exit points. They can also be used to identify areas of compression and to spot the ends of extended moves.

The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; option traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.