Bollinger Bands (page 158)

Analysis's have traditionally drawn envelopes above and below moving averages in an attempt to capture the overbought and oversold conditions as an alternative to the oscillator concept. Bollinger bands operate in a similar way, except the envelopes or bands are calculated using standard deviations.

The bands expand or contract depending on the level or volatility.

Rules for interpretation:

• When the bands narrow, there is a tendency for sharp price changes to follow
• If price exceeds a band, the trend is expected to continue.
• When the price traces out of a reversal formation after it has crossed outside a band, expect a trend reversal.