Bollinger bands consist of a center line and two price channels (bands) above and below it. The center line is an exponential moving average; the price channels are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction). In the Figure above, a Bollinger Band is shown for Ford for a period of one year (May 2009 - May 2010). A stock may trade for long periods in a trend, albeit with some volatility from time to time. To better see the trend,
traders use the moving average to filter the price action. This way, traders can gather important information about how the market is trading. For example, after a sharp rise or fall in the trend, the market may consolidate, trading in a narrow fashion and criss-crossing above and below the moving average. To better monitor this behavior, traders use the price channels, which encompass the trading activity around the trend.
