"Bollinger bands (BB) consist of three lines - upper, middle and lower band. The middle band is the moving average line which acts as a trend indicator. The upper and lower bands are a measure of volatility determining upside and downside of the trend."

Bollinger Bands helps a trader to:

• establish the direction of the trend 
• identify potential reversals and pullbacks
• monitor volatility in price movement

How does BB work?

• When the stock breaks through the upper band (resistance level), Buy signal is generated. When the stock breaks through the lower band (support level), Sell signal is generated. However, if prices immediately move back inside the band, then the suggested signal is negated.
• When the distance between the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction
• When the distance between the bands widen by an unusual large amount, volatility increases, it indicates end of an existing trend
  
  

Day Trading with BB in Uptrends

• BBs help assess how strongly the stock is rising (uptrend) and when is it losing strength or reversing
  
  Guidelines for using BB in Uptrend
  
  
• When the price is in strong uptrend, it touches or runs along the upper band during impulse waves higher. If the price fails to do that it implies that uptrend may be losing its momentum. 
• During an uptrend at certain period of times prices will drop, this is called pullbacks. If the price is moving up strongly then the pullback lows will typically occur near or above the middle band. If the pullback stalls near the middle line, it shows buying strength.

Tip - When the price is in a strong uptrend it shouldn't touch the lower band. If it does that's a warning sign for a reversal

Day Trading with BB in Downtrends

• BBs help assess how strongly the stock is falling (downtrend) and when is it strengthening (to the upside) or reversing
  
  Guidelines for using BB in Downtrend
• When the price is in a strong downtrend it will typically touch or run along the lower band during impulse waves lower. When it fails to do that it shows the downtrend may be losing momentum.
• During a downtrend at certain period of times prices may rise, this is called pullbacks. If the price is moving down strongly then the pullback highs will typically occur near or below the middle band. If the pullback stalls the prices near the middle line, it shows selling strength.

Tip -When the price is in a strong downtrend it shouldn't touch the upper band. If it does that's a warning sign for a reversal

Identifying Trend Reversals with BB

• If the price is in an uptrend, and continuously hitting the upper band (and not the lower band), when the price hits the lower band it could signal that a reversal has commenced. If the price rallies again, it is likely it won't be able to reach the upper band or the recent price high.

• If the price is in downtrend and continuously hitting the lower band (and not the upper band), when the price hits the upper band it could signal that a reversal has commenced. If the price declines again, it is likely it won't be able to reach the lower band or the recent price low.

Things to Remember about Bollinger Bands

• Volatility - BBs are great tool to understand how wildly stock moves from peaks (high) to valleys (low)
• Beware of Tight Bands - Low Volatility signifies the quiet before the storm
• Use Default Settings - Generally 20 moving average and 2 standard deviations works well
• Riding the Bands - Riding the bands work, but remember markets only trend about 20% of the time. More money can be made between the bands
• Pull Back to SMA - Identify strong trends and buy on pullback to SMA
• Validate Trade Signals - Confirm buy & sell signals with other indicators like RSI, MACD, trendlines to avoid losses
• What time frames work best with BB? - BBs work well on all chart time frames, however longer time frames like 1 hour and 4 hour charts give better signals