measure the market's volatility on deviations from its
moving average. During times of low volatility, the bands contract closer
to its moving average indicating that prices are relatively stable, the bands
widen when price deviates further away from the simple moving average indicating
huge swings in prices are in effect. Contracting bands indicates consolidation
among buyers and sellers, you should pay close attention when the bands contract
because there is always a possibility that a breakaway is about to unfold.
The key to bollinger bands is to
look for a contracting scenario and carefully assess which direction it might go next.
Rarely does the price remain sideways for a long time when these bands contract
and therefore a good tool for entry and exit planning.