Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.
The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.
Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average that serves as the base for the upper band and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purposes.
Examples:
A
B.
In example A above notice how the lower band responds to price as it approaches.
Look at example B as price approaches.
Once continues a small trend while the other pierces and reverts to the mean.
This reaction to approaching price is just the beginning of what Bollinger bands will tell you.
If you know what to look for with from both the upper and lower band, you are able to identify incredibly accurate entries as well as some rather perfect exits.
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