Bollinger bands are bracketed by an upper and lower band and contain a 21-day simple moving average. For any maths fans the outer bands are plotted two standard deviations above and below the price. Since standard deviation measures volatility, when the markets become more volatile, the bands widen; during less volatile periods, the bands contract.

There are several ways to use the bands to trade which are explained in our learning resource guide. One is “the squeeze”. When the bands tighten this is sign of a low volatility and can be used as a sign of incoming volatility. If you can determine the direction of the trend using fundamentals and other indicators this can be a used to confidently confirm that there will be volatility.

A breakout of the Bollinger band is a major evident as 90% of price action remains inside the bands. These can be used as dips to purchase.