Bollinger Bands are a type of envelope developed by John Bollinger. However, where envelopes are plotted at a fixed percentage above and below a moving average, Bollinger Bands are plotted at standard deviation levels above and below a moving average. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

Bollinger Bands can be used in various ways. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. The use of Bollinger Bands is not confined to stock traders. Options traders often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.