Bollinger Bands®

Bollinger Bands® are a technical indicator designed by John Bollinger. Bollinger Bands® are a volatility indicator and consist of three lines:

• N-period moving average (20-period is the standard setting)
• upper and lower bands at K (2 is the standard setting) times an N-period standard deviation above and below the moving average

The purpose of Bollinger Bands® is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. The standard deviation is a measure of volatility and Bollinger Bands® adjust themselves to the market conditions. When the prices become more volatile, the bands widen, and during less volatile periods, the bands contract. The tightening of the bands is often used as an early indication that the volatility is very low and a break out could be expected. Bollinger Bands® could be used by option traders for volatility based strategies.