Bollinger Bands—named for John Bollinger, their creator—are a lagging upper chart indicator that plots three lines:

• a Simple Moving Average (SMA)
• an upper band that sits above the moving average
• a lower band that sits below the moving average

The upper band and lower band adjust in accordance with the standard deviation levels of the security.

The upper band is plotted at two standard deviations above the SMA. The lower band is plotted at two standard deviations below the SMA.

According to John Bollinger, periods of low volatility often precede periods of high volatility, or relatively large price swings.

Because standard deviation measures price volatility, Bollinger Bands are useful for identifying periods of low and high volatility. When the price contracts, or becomes less volatile, the two bands narrow. When the price expands up or down, and becomes more volatile, the two bands widen.

As well, price moves that pierce the bands may imply a continuation of the current uptrend or downtrend.

Trend reversals, on the other hand, may be signaled when bottoms and tops made outside the bands are followed by bottoms and tops made inside the bands. Bollinger also believes that a price move originating at one band tends to extend to the other band.