Bollinger Bands
Bollinger Bands are a volatility indicator consisting of a moving average with upper and lower bands set a number of standard deviations above and below it.
Developed by John Bollinger in the 1980s, the standard setting uses a 20-period simple moving average as the middle band and places the upper and lower bands two standard deviations away. Because standard deviation measures volatility, the bands widen when prices swing more and narrow when markets are calm.
With a normal-shaped distribution, about 95% of prices would fall within two standard deviations, so moves outside the bands are relatively unusual. Some traders treat touches of the upper band as a sign of stretched prices and touches of the lower band as potentially oversold.
In strong trends, though, prices can ride along one band for an extended time. A period of very narrow bands, called a squeeze, often precedes a large move, although the direction is not indicated.
Example: if a stock's 20-day SMA is $50 and the standard deviation of the last 20 closes is $2, the upper band is $54 and the lower band is $46.