The Bollinger Bands is a technical indicator with an envelope band, on which the Bollinger Band is plotted several standard deviations from it. Standard deviation is a measure of volatility, therefore Bollinger Bands adjust to market conditions. As the market becomes more volatile, the band widens and contracts during less volatile periods.
Bollinger Bands are usually plotted on a price chart, but can also be added to an indicator chart (Custom Indicators). The Bollinger Bands interpretation is based on the fact that the price tends to stay between the upper and lower lines of the line. The distinctive feature of the Bollinger Band indicator is its variable width due to price volatility. In periods of substantial price swings (i.e. high volatility), the bands widen leaving plenty of room for price to move in. During periods of rest or periods of low volatility, the bands’ contract keeping the price within their limits.
The following features are specific to the Bollinger Band:
Sudden price changes tend to occur after the band has contracted due to decreased volatility.
If the price breaks one of the bands, a continuation of the current trend is expected.
If the spikes and hollows outside the band are followed by spikes and hollows inside the band, the reverse of the trend can occur.
The price movement that starts from one of the bands usually reaches the opposite. The last observation is useful for predicting changes in price direction.
It is recommended to use the 20 periods Simple Moving Average as the centerline, and plot the top and bottom lines two standard deviations from them. Moreover, the moving average of fewer than 10 periods has little effect.