Bollinger Bands are essentially the standard deviation of a stock’s volatility, more specifically, these bands are plotted 2 standard deviations away from a simple 21 day moving average; the greater the volatility of the stock, the wider the bands get.
In the above picture, the arrows are pointing to the Bollinger Bands and the center line or 21 day simple moving average. The bands will widen the more volatile the stock gets, and they will contract or narrow once the price begins to level out and is no longer experiencing high levels of volatility.
When the price pattern is closing into the lower band, the stock is considered oversold, and when it gets closer to the upper band, the stock is considered overbought. Now I like to glance over my MACD when the stock crosses over the 21 day moving average of the Bollinger Bands, you can see that the MACD in the circled portion is beginning to indicate an upward trend, which means you should consider jumping in. I usually let it play out for a few seconds, depending on the volume, and if the price remains above the 21 day moving average, then we have a very good chance of making some real money.
Remember to stay vigilant! Once you’re in, don’t you dare leave the stock unattended! Things can easily go against you so it’s always in your best interest to keep an eye on your trade.
Note: ThinkorSwim uses 20 “bars” as the 21 day simple moving average.