Bollinger Bands are a technical indicator that was produced for the purpose of comparing price fluctuations with price levels over a specified time period. The indicator is composed of what is stated in the name: bands. There is an upper band, lower band, and the middle line in between the two bands is the SMA.

The upper band differs from the lower band in that there is an additional 2 standard deviation units in its calculation. The lower band has 2 standard deviation units subtracted from it. This deviation is what measures the price fluctuations, or the price volatility. Thus, when prices are sharp, incosistent, and erratic, the bands will be further apart and less narrow.

In its computation, closing prices are traditionally used. A 20-day SMA is most often used. However, trial and error should be used in respect to the degree of volatility in an asset. If the distance between the lower band, and the trend line has a gap, decrease the SMA of the Bollinger Band to generate a better fitting, more accurate indicator.

Bollinger Bands are fairly easy to use. To simplify, if a trend is travelling below the middle SMA of the band for more than 2 sticks (or bars), wait till it crosses above the SMA, then buy. A sell signal occurs when the trend is travelling above the middle SMA for more than 2 bars and when it finally crosses below the SMA.

As you can see, we marked the signals on the chart in a sh

aded gray. Notice how the price always remained either below of above the middle green SMA line for more than at least 2 bars. When it finally crossed over, the trend changed - for the most part.

For more information on Bollinger Bands, and to check out a signal phenomenon within the bands call the Bollinger squeeze, click here.

Once again, this indicator is not 100% accurate, so use with other signals at your own judgement.