bollinger bands a popular tool among investors and traders helps gauge the volatility of stocks and other securities to determine if they are over or undervalued developed in the 1980s by financial analyst john bollinger the bands appear on stock charts as three lines that move with the price the center line is the stock price s 20 day simple moving average sma the upper and lower bands are set at a certain number of standard deviations usually two above and below the middle line 
the bands widen when a stock s price becomes more volatile and contract when it is more stable many traders see stocks as overbought as their price nears the upper band and oversold as they approach the lower band signaling an opportune time to trade 1while valuable bollinger bands are a secondary indicator that is best used to confirm other analysis methods below we guide you through how to interpret bollinger bands when the tool is best used and what other indicators are best matched with it image by sabrina jiang investopedia 2021who is john bollinger john bollinger cfa cmt has been a major influence in technical analysis and is best known for developing bollinger bands in the 1980s bollinger combined his background in mathematics and engineering with financial market analysis to create this tool which uses a moving average and the statistical measure of standard deviation to assess the volatility and trends of stock prices 2 the tool has since become a staple in technical analysis he is also the founder of bollinger capital management a money management company and has been a prominent commentator and analyst on market conditions 3investopedia joules garciaconstructing bollinger bandsthe three lines that make up bollinger bands are based on a security s price moves the center line is the intermediate term trend and is typically a 20 day sma of the closing prices the upper and lower bands are plotted a distance from the sma set by a certain number of standard deviations usually two above and below the center line 1to calculate the bands you first determine the number of periods used for both the sma and standard deviation and the number of standard deviations for the upper and lower bands should be from the center line while the settings can be adjusted based on your strategy most times you would use a 20 day sma and two standard deviations 4the upper band is found by adding two standard deviations to the center sma line while the lower band is calculated by subtracting two standard deviations from the center line the bands automatically widen when price volatility increases and narrow when volatility goes down you don t need to break out your calculator and graph paper many popular trading platforms like tradingview include this technical indicator as a standard feature thus you can easily overlay bollinger bands onto price charts you can also usually customize the bollinger bands settings increasing or lowering the periods and standard deviations to fit your needs given that the bands are plotted two standard deviations away from the sma they can indicate when prices are statistically high or low many traders consider the area near the upper band to be overbought territory the price is poised to fall and a potential resistance level where sellers may step in conversely the area near the lower band is often seen as oversold the price is poised to go up and a potential support level where buyers could enter the market 