Bollinger Bands® (BB)
Bollinger Bands® is an indicator that consists of two trend lines. The upper trendline is usually set up with two standard deviations (modifiable) from a 20 (modifiable) period Simple Moving Average (SMA), the bottom trendline is calculated the same way however the standard deviation is negative.
The BB’s can tell the user many things. Just like the Relative Strength Index (RSI), it can help in determining if the current price is within an overbought or oversold territory. Another thing BB’s are great for is being able to visualize the volatility of the market, the closer the two bands are together the less volatility there is in the market, the opposite is true when the bands are far apart. BB’s can also help in determining the direction of the market, if the price action is between the upper band and the SMA then the market is deemed to be bullish, while the price action is between the bottom band the SMA then the market is deemed to be bearish.
Bollinger Bands® Formula
Image Source: Investopedia
For more information (also the source) visit: Investopedia and BollingerBands