Investors often find Bollinger Bands very useful because they show when index or stock levels are reaching extremes.
This is accomplished because Bollinger bands (on a 20-2-2 setting) measure the tick action against two standard deviations of action.
Typically, when a tick is above or below the extreme bands, it indicates an overbought or oversold condition. So traders pay attention when this happens because a pull back or rise from a low is highly probable.
One way to ascertain if this may be the case, is to look at the level of a 9 day RSI indicator reading. If it is in the 70 to 80 area, then the market is reaching an overbought area. If that reading coincides with a tick above the upper Bollinger, then the overbought possibility becomes a higher probability. ((The opposite applies (20 to 30 area) on the down side.))
