The bands perform best as resistance/support and as a gauge of overbought/oversold conditions when they are in an extended state and hence volatility is high. In such a state, counter-cyclical strategies can be promising when prices touch the bands. It makes sense to also use other techniques from the field of technical analysis. Examples include candlestick reversal patterns, oscillators (e.g. Stochastic Oscillator, RSI), volume indicators and sentiment indicators. If the distance between the two bands is unusually small, this indicates that a new trend impulse could start shortly, which in turn will lead to an expansion of the bands. In this case, prices breaking above the upper Bollinger Band can be taken as a buy signal, and breaking below the lower band as a sell signal, especially if the breakout is in the direction of the overall trend. Some traders then use the midline or the band opposite the breakout as a moving stop-loss level for the entered position. Furthermore, the three bands are used by some users as price targets. When prices detach from the lower Bollinger Band, the middle line becomes the next price target. If this is exceeded, the upper Bollinger Band then moves into focus as a price target. Of course, the whole thing also applies to a movement from the upper band downwards.
Bollinger Bands: How to use the technical indicator in your investment decisions
