Bollinger Bands (BB) are a widely popular technical analysis instrument created by John Bollinger in the early 1980’s. Bollinger Bands consist of a band of three lines which are plotted in relation to security prices. The line in the middle is usually a Simple Moving Average (SMA) set to a period of 20 days (The type of trend line and period can be changed by the trader; however a 20 day moving average is by far the most popular). The SMA then serves as a base for the Upper and Lower Bands. The Upper and Lower Bands are used as a way to measure volatility by observing the relationship between the Bands and price. Typically the Upper and Lower Bands are set to two standard deviations away from the SMA (The Middle Line); however the number of standard deviations can also be adjusted by the trader.
Bollinger Band is used to detect overbought/oversold condition once prices makes a break through from the upper or lower band. If the price breaks through the upper band, it is considered as overbought thus generating a sell signal and if the price breaks through the lower band, it is considered as oversold which generates a buy signal.
Bollinger Band uses 20 period of smoothing on all bands.