Bollinger Bands

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative prices levels over a period of time. The indicator consists of three bands designed to encompass the majority of a currency's price action.

1. A simple moving average ("SMA") in the middle
2. An upper band (SMA plus 2 standard deviations)
3. A lower band (SMA minus 2 standard deviations)

Standard deviation is a statistical term that provides a good indication of volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp increases or decreases in prices, and hence volatility, will lead to a widening of the bands. Long periods of sideways movements will lead to a narrowing.

Bollinger Bands are designed to capture the majority of price movement. When prices move beyond the upper or lower band, they are considered high (overbought) or low (oversold) on a relative basis.