Bollinger Bands

This technique was developed by John Bollinger. Two trading bands are placed on either side of a moving average (these bands are called Bollinger bands). The Bollinger bands are placed two standard deviations above and below the moving average. (Standard deviation is a statistical concept that describes how prices are dispersed around an average). Two standard deviations would mean that 95% of the price data would fall within the two trading bands.

Prices are generally considered overextended on the upside when trading at the upper band (overbought) and when prices touch the lower bands, they are generally considered overextended on the downside (oversold) depending on the time horizon and the moving average that is used.

The simplest way to use Bollinger bands is to set the upper and lower bands as price targets for the time horizon and the moving average for which they are calculated.