Bollinger Bands
Bollinger bands are trading bands developed by John Bollinger.It consists of a 20 period simple moving average with upper and lower bands. The upper band is 2 standard deviation above the moving average and similarly lower band is 2 standard deviation below the moving average. This makes these bands more dynamic and adaptive to volatility.
This would be clearer from figure below
Interpretation of Bollinger Bands
Mr. John Bollinger described following important interpretation of Bollinger bands in projecting price trends.
1. Big move in price is witnessed on either side when bands tightens/contracts as volatility lessens.
2. The upper band act as area of resistance and lower band act as area of support.
3. When prices move outside the band, it signifies breakout, hence continuation of the trend.
4. Bottoms and tops made outside the band, followed by tops and bottoms made inside the band suggests reversal of the trend.