A band plotted two standard deviations away from a simple moving average, developed by famous technical trader John Bollinger.
In this example of Bollinger bands, the price of the stock/CFD is banded by an upper and lower band along with a simple moving average (SMA).
The standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is possibly about to increase.
This is one of the most popular technical analysis tools. The closer the prices move to the upper band, the more overbought (BULLISH) the market, and the closer the prices move to the lower band, the more oversold (BEARISH) the market.
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument.