Bollinger Bands was created in early 1980s by John Bollinger who is well known in trading circles for his analytical skills. He has his own company called Bollinger Capital Management Inc.
We all know that a stock price is always volatile. However, sometimes it is more volatile and sometimes less volatile due to several reasons. Usually, when the price is highly volatile, it is the time when there is high change in prices.
Bollinger bands helps in providing relative definition of high and low from the average trend. Basically, we will have three bands in Bollinger bands. The middle band is the trend that is captured by simply moving average. This middle band serves as a base for upper band and lower band.
The distance between “middle band and Upper band” or “middle band and lower band” are determined by the volatility using standard deviations.
So it can be now interpreted as the more the volatile the price is, the higher are the chances that the price will touch the upper band or lower band.
Let us now use Candlesticks in some Indian stock, ONGC and use the bollinger bands as an overlay indicator.
There are some interesting patterns that you can get from this bollinger bands. Whenever a candle crosses the upper band, it shows a reversal trend. Same applies to the lower band. Whenever the candle cross the lower band, it shows a reversal trend.