Bollinger Bands are plotted at standard deviation levels above and below a moving average. Prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of prices. During periods of extreme price changes (i.e. high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e. low volatility), the bands narrow to contain prices. According to John Bollinger's own interpretation:
- sharp price changes tend to occur after the bands tighten, as volatility lessens
- when prices move outside the bands, a continuation of the current trend is implied
- a move that originates at one band tends to go all the way to the other band