Bollinger bands - Bollinger Bandshave 3 lines, one at the top, one in the middle and one at the bottom.

Bollinger bands are plotted above and below a moving average.

Bollinger bands are plotted as standard deviation and are therefore sensitive to volatility.

Their characteristic is to widen during volatile periods and contract during calmer periods.

It is always important to plot bollinger bands on your price chart.
Since the distance between the upper and lower bands change according to volatility in the market.

When the difference between the bands are shorter, the price variation is small.

Smaller price mean less volatility.

When distances are greater we see a bigger variation in the price.

Higher price fluctuations means higher volatility, and higher volatility means greater greater distance between the bollinger bands.

Prices usually stay within the upper and lower bands

However, there are four main characteristics to Bollinger bands.

Sharp price changes tend to occur after bands tighten as volatility lessons.

As we can see here, each time the bands tighten a change in the price occurs thereafter.

When the price moves outside the bands, a continuation of the current trend is implied.

See here that each time the price goes outside the bands, the continuation continues.

When a price makes a bottom outside the bands, and this is followed by another bottom inside the bands a reversal in the trend is probable.

The same signal is valid at the tops.

As you can see here, when the price makes a top outside the bands, and this is followed by a top inside the bands, a reversal of the trend is likely.

When the price begins it's move at one band it tends to go all the way to the other band.

This observation is useful when projecting price targets.

If the price crosses the middle band it will usually go all the way all the way to the other band.

Bollinger bands can also be used as an indicator for over bought and over sold markets.

When the price in near the upper band the market is over bought.

When the price in near the bottom band then market is over sold.

As always we have to remember that a security that has extended into over bought and over sold territory can continue to become more over bought or over sold.

Therefore we need to look for evidence in the trend from other indicators before taking any action