Bollinger Bands

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a security's price action.
1. A simple moving average in the middle
2. An upper band [SMA plus 2 standard deviations (SD)]
3. A lower band [SMA minus 2 standard deviations (SD)]

For general time frames, Bollinger recommends a 10-day simple moving average (SMA) for the short term, a 20-day simple moving average (SMA) for the intermediate term and 50-day simple moving average for the long term.

BigCharts use a 20-day SMA but does not display the SMA in the chart. It incorporates the upper band (2 SD above SMA) and lower band (2 SD below the SMA). Notice how well the Bollinger Bands contained the weekly closing prices of the S&P 500 over the past ten years, especially the price activity over the past several weeks! See the following chart.Note: To enlarge chart, double-click inside of it.

It should be noted that Bollinger did not use this indicator to generate buy and sell signals when prices reach the upper or lower bands. Such levels merely indicate that prices are high or low on a relative basis. A security can become overbought or oversold for an extended period of time. However, knowing whether or not prices are high or low on a relative basis should assist and enhance one’s buying and/or selling decisions.
Source: StockCharts.Com