Bollinger Bands

This indicator, developed by famous technical analyst John Bollinger is a band generally placed x standard deviations (usually 2) apart from a simple moving average.

As standard deviation is a measure of volatility, Bollinger bands adjust themselves accordingly to market conditions. As soon as the markets increase in volatility, the bands expand (move further away from the moving average), while during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is regarded by technical traders as a sign that the volatility is about to increase sharply.

This technical analysis technique is among the most popular used by traders. The closer the prices move towards the upper band, the more overbought the market, and the closer the prices move towards the lower band, the more oversold the market is. Therefore the bands constitute strong zones of support and resistance when the market is without a clear trend. The first parameter is the number of days for the moving average. The second parameter is the standard deviation.