Indicator – The Bollinger Bands

The Bollinger Bands is a volatility indicator that helps us determine how volatile a trading instrument is. The Bollinger Bands are composed of three bands or lines that shrink together when there is low volatility in the market or expand when there is high volatility in the market. The middle band is a 21 period simple moving average of the closing prices. The upper band is two standard deviations of the middle band and the lower band is minus two standard deviations of the middle band or 21 period moving average.

Usually, low periods of volatility are followed by high periods of volatility. That is why if we see the Bollinger Bands get together very close to each other; it means that the market may be getting ready to move. On the contrary, if the bands get away from each other, it means that the market has been trending, but the trend may be exhausted and a possible reversal may be near.