In this example of Bollinger bands, the price of the stock is banded by an upper and lower band along with a 21-day simple moving average.
Watch: Bollinger Bands
Because standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen , and during less volatile periods, the bands contract . The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.
This is one of the most popular technical analysis techniques. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.
