Bollinger Bands

Bollinger Band was developed by John Bollinger in early 1980s.This tool plots a trading band above and below a moving average to compare volatility and relative price levels over a period of time.
Construction of Bollinger bands is simple.A simple moving average (20-day moving average) is first plotted.The upper and lower bands are plotted two standard deviations away from this moving average line.Since standard deviations reflect volatility in the underlying stock's price movement,in periods of high volatility,the bands tend to widen and when the volatility is low,the bands contract.
A simple moving average is used as a default preference;however,other types of averages can be used if necessary.Generally,20 day simple moving average is used for the middle band and 2 standard deviations for the external bands.However,the length of the simple moving average and number of deviations can be modified according to the preferences of the user.

Bollinger Bands' usage differs extensively with the traders who follow it.some traders initiate a buy when the stock price touches the lower band and exit the trade when the stock price touches the simple moving average between the bands.Some traders initiate buy positions when the stock penetrates the upper band or sell when the stock price declines below the lower band.
When the bands have only a slight slope and lie approximately parallel for an extensive time the price of the stock will oscillate up and down between the bands in a channel.
As with most technical indicators,Bollinger Bands should be used in combination with other tools of technical analysis as well as other non-momentum based indicators to see if there is confirmation.