What are bollinger bands?

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Bollinger bands were created in the 1980s by John Bollinger. It is a stock oscillator designed to help a trader predict what could happen in the near future for a given stock.

This popular oscillator uses price and a statistical formula called standard deviation to plot the outer lines on the chart. Standard deviation takes a set of numbers and calculates the range a given stock is likely to stay between.

The likely hood of it staying between those ranges depends on how many standard deviations you use on the chart. 1 SD = 68% 2 SD = 95% 3 SD = 99%. At least this is the theory. Below is an example of how it looks on a chart.

The idea is, if a stock is at the bottom of its range it is likely go up, vice versa. One of the big benefits of this oscillator is that because it uses only the last so many days of price movement it adjusts to different markets.

In volatile markets the bands will expand, in non volatile markets the bands will contract. Many traders will take note that when the lines get closer together it could signal that the stock is going to make a big move.

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