Bollinger Bands, developed by Technical Trader John Bollinger, are two lines showing the standard deviation above and below a simple moving average. These bands adjust themselves to the market typically at 2 standard deviations. There are a few ways to utilize Bollinger Bands....
- Widening bands indicate a more volatile market. Traders should trade accordingly.
- Narrowing bands indicate the possibility of a sharp increase in volatility. This can be taken advantage of with the appropriate trade measures such as a Straddle of a Strangle.
- Price action well above the top band. In this case, there is typically a short term Short opportunity.
- Price action well below the lower band. In this case, there is typically a short term Long opportunity.
See below for an example of Bollinger Bands (yellow lines) based on a 20 day Simple Moving Average set at 2 standard deviations:
Related terms: Arms Index (TRIN), Market Breadth, Parabolic SAR, RSI, Fibonacci Retracement, Geometric vs. Functional Indicators, Elliot Wave Theory
p.s. - Bollinger Bands are a common form of Technical Analysis often used within a Day Trading System, Stock Trading System, Options Trading System, and Futures Trading System.