Bollinger Band

A Bollinger Band is a technical tool to display a graphical band defined by a set of lines plotted two standard deviations (positive and negative) both side of a simple moving average (SMA) of the security's price, but can be adjusted as analyst preference.

when the instrument becomes more volatile the bands expand; during less volatile periods, the band's contract.

Bollinger Band is a highly popular technical tool among trader. Many analysts believe the closer the prices move to the upper level of the band, indicate the  the market, and the closer the prices move to the lower level of the band, indicate the more oversold the market.

The use of Bollinger Bands varies among traders. Some traders buy when the price at the lower Bollinger Band and exit when price touches the moving average in the centre of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when the price falls below the lower Bollinger Band. Some trader 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 towards the average historical volatility level for the stock, currency and commodity.

Traders must use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be paired with a non-oscillator indicator like chart patterns or a trendline. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility.