Bollinger Bands

Bollinger Bands were created by John Bollinger in the 1980s and consist of three lines: a middle 20-period moving average and upper and lower bands set at two standard deviations from that average. Because the bands use standard deviation, they expand automatically when volatility increases and contract when volatility decreases, making them self-adjusting to market conditions. One of the most important Bollinger Band concepts is the squeeze, where the bands tighten significantly because volatility has dropped to unusually low levels, this often precedes a sharp directional move. Contrary to common intuition, touching the upper band in a trending market is often a sign of strength, not an automatic sell signal, because strong trends can walk the upper band for extended periods. The middle band frequently acts as a dynamic support or resistance level during trend pullbacks.