Bollinger Band

Bollinger band is a volatility or standard deviation based oscillator which comprises three components. The middle band is a moving average line and the other two bands are predetermined, usually two, standard deviations away from the moving average line. As the volatility of the stock prices changes, the gap between the bands also changes. During more volatile markets the gap widens and amid low volatility conditions, the gap contracts.
 

Bollinger bands involve the following calculations:

1. Middle Band: 30 Day moving average

2. Upper Band: Middle Band  + 2 x 30 Day Moving Standard Deviation

3. Lower Band: Middle Band  – 2 x 30 Day Moving Standard Deviation
    

As with most technical indicators, values for the look-back period and the number of standard deviations can be modified to fit the characteristics of a particular asset or trading style.
 

As depicted in the chart above, when the prices continually touch the upper band, the asset is usually in an overbought condition, conversely, when prices are regularly touching the lower band, the asset is usually in an oversold condition.

These overbought and oversold indications shouldn’t be interpreted as direct buy/sell signals. Though, they can be a part of the signal generating decision process.