Bollinger Bands are a volatility indicator developed by John Bollinger in the 1980s. They consist of three lines: a middle band that is a simple moving average (SMA), an upper band at a specified number of standard deviations above the SMA, and a lower band at the same number of standard deviations below. The bands automatically widen when volatility increases and narrow when it decreases.

The formulas are: Middle Band = SMA(n), Upper Band = SMA(n) + k x StdDev(n), and Lower Band = SMA(n) - k x StdDev(n), where n is the period and k is the multiplier (typically 2). Two derived metrics are also useful: Bandwidth = (Upper - Lower) / Middle x 100 measures overall volatility, while %B = (Price - Lower) / (Upper - Lower) x 100 shows where price sits relative to the bands.

Traders use Bollinger Bands in several ways. A Bollinger Squeeze occurs when bandwidth narrows to a low level, often preceding a significant price move. Prices touching or exceeding the upper band may indicate overbought conditions, while prices at or below the lower band may suggest oversold conditions. However, in strong trends, prices can ride along a band for extended periods. Combining Bollinger Bands with other indicators like RSI helps confirm signals and improve trading decisions.