Bollinger bands are envelops that surround the price bars on a chart. Click here to see an example. Bollinger band consists of the middle band, upper band and lower band. Middle band is a simple moving average (N period), upper band is K times N period standard deviation above the middle average and lower band K times N period standard deviation below the middle average. For short term trading, the simple moving average is suggested to be 10-days simple moving average, 20 days for intermediate and 50 days for long-term trading. Standard deviations for short term trading should be 2 for lower band and 20 for upper band.
Note that bollinger bands do not generate any buy or sell signals. Not all by themselves that is. They should be used with other technical indicators such as relative strength index (RSI). For example, if the price touches the upper band and RSI is below 70 then this is an indication that the trend will continue. If the price touches the lower band and the RSI is above 30 then this is also an indication of trend continuation.
If you want to see possible trend reversals on the chart with bollinger bands and RSI then it can be seen IF the price touches the upper band and the RSI is above 70 or if the price touches the lower band and the RSI is below 30.
For computing bollinger bands, usually close prices are being used.
Bollinger bands have mainly two uses, to identify high and low periods and to identify prices that are on extreme levels. Contracting bands also give an indication that the market is about to trend – the first breakout is often a false alarm follower by the move towards the opposite direction.
Duh...I do agree it might sound complicated...even to me. And you might not fully understand it - the reason for that is that I don't fully understand it either, so there might be some updates to this post soon. However, as I learn something every day (even if I'm not posting it here), I believe in the idea that even if I knowlingly can't always understand something or if I can't remember some things later, the general understanding of it all is generating itself in my brain...so even if I don't complitely understand something, I still get SOMETHING from it...and I hope you do too. And when going back to it afterwards, it will be a lot easier to understand.