Bollinger bands are considered some of the most useful bands in technical analysis, for they vary in distance from the moving average of a share’s price based on the share’s volatility. During periods of increased fluctuation, the bands widen to take this into account, and when the fluctuation decreases, the bands are tapered for a narrower focus to the price range. The upper band is the standard deviation multiplied by a given factor above the simple moving average, and the lower band is the standard deviation multiplied by the same given factor below the simple moving average.

Calculation of the Bollinger Bands:

Characteristics of Bollinger Bands:

1. Widening or contracting of the Bands indicating the market volatility.
2. When Band width is wider, it suggests a high volatility.
3. If price rally when bands are opening wider, it suggests that a rally is likely to continue. Thus, a buying signal.
4. If price declines when bands are opening wider, it suggests a decline is like to continue. Thus, a selling signal.
5. When Band width is narrower, it suggests a low volatility, thus price consolidate.
6. A pull-back effect will take place when price is away from the outer bands.
7. Best use of Bollinger Bands is during a quiet side-ways market.

Bollinger Bands Pull-back effect:
When price is away and above the outer band, (upper band or lower band), a pull-back effect will usually happen. This is because the price movement has been over heated, and it is only logical to have a correction before the rally or the decline continues.  A pull-back effect is confirmed when you see a red candle away from the upper band. (For pull-back effect from the lower band, confirmation is when you see a  green candle)

Bollinger Bands width reaction:
The longer the consolidation period, the stronger and wider the opening of the band wider relatively. In addition, when the narrower the Band width contracts, the wider the band width opens relatively.

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