Trader's Glossary

Bollinger Bands

Developed by John Bollinger in the 1980s, Bollinger Bands are a chart overlay volatility indicator used in technical analysis to measure high and low prices in relation to historical price action. Bollinger bands are comprised of a moving average and two trading bands, one added and one subtracted standard deviation above and below it. The bands indicate volatility, when they are far apart then volatility in the asset being charted is high, when they narrow in on the moving average then volatility is low. When an asset’s price consistently touches the lower band then it is regarded as being oversold and may be due for a reversal. When its price continues to touch the upper band it is thought to be overbought and considered likely to reverse. In an uptrend price action will move between the moving average and the upper band, if it crosses below the moving average line a downward trend reversal may be in effect. Conversely, in a downtrend price action will tend to move between the moving average and the lower band, should it cross above the moving average an upward trend reversal may be in effect.