Bollinger Bands are a popular technical indicator for traders to determine overbought and oversold conditions. In a range-bound market, for example, it works even better as prices travel between two "rubber bands," or like balls bouncing off the walls.

But using the Bollinger Band as a sole buy/sell indicator isn't very smart. It's why we also use &b (percent b which shows where these touches may likely be located) and candlestick signals to help call tops and bottoms. "Tags of the bands are just that —tags, not signals. A tag of the upper Bollinger band is not in and of itself a sell signal. A tag of the lower Bollinger band is not in and of itself a buy signal."

And if you try to use Bollinger Bands by themselves, you can get stopped out or worse as prices "walk the bands" with direction. Again, it's why we use %b and candlesticks, too.

With Bollinger Bands (plotted at standard deviation levels above and below moving averages), stock prices tend to stay within the upper and lower bands. So when the prices move above the upper Bollinger Band, are coupled with a bearish candlestick read (gravestone doji, for example), and an extreme overbought %b read is present, we expect a reversal at the top.

Bollinger Bands allow users to compare volatility and relative price levels over a period of time. They consist of three bands:

A simple moving average (SMA) in the middle. . .

An upper band (SMA plus 2 standard deviations). . .

A lower band (SMA minus 2 standard deviations). . .

Standard deviation, a statistical term that provides a good indication of volatility, ensures the bands will react to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases) will lead to a widening of the bands.


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