Using Bollinger Bands for market analysis has become a widely popular method for determining price direction. Bollinger Bands will work with any market and are useful for identifying price volatility.

The bands expand or move in the opposite direction when volatility of a stock, commodity or index increases. The higher the volatility the wider the bands become. As volatility decreases the bands begin to come together or move towards each other. Once volatility bottoms out the bands begin to move parallel to each other. Price action tends to move sideways and can touch the upper band and the lower band before breaking out to a more volatile environment.

During this period of low volatility the bands are in what is known as a "squeeze". That is, the bands squeeze the price together and it seems contained for a period of time. This is a good price setup that often leads to large price movements when prices break out of the squeeze. Look for prices to move to one of the bands, touch the band and continue moving in that direction. The bands then begin to expand once again and volatility returns. Prices tend to continue in the direction of the break out for awhile, often correcting back to the trailing moving average, then continuing in the direction of the trend. Once prices correct back to the moving average and close above that point, caution is warranted as this could lead to a period of reversing price action and a change of trend.

It should be noted that occasionally when prices begin to break out of a squeeze and head in a certain direction that they may reverse in what is known as a "head fake", and continue in the opposite direction in what is usually a very strong move. What this looks like on the chart is a move to one of the bands (either top or bottom), the band begins to expand in the direction of the move, prices begin a small correction and consolidate, then they either continue the break out direction or they reverse. Other indicators such as momentum or stochastics can help to determine if the move is for real or not. Either way there is going to be a strong move, it's just a matter of getting on the right side of the move. If a position is taken on the direction of the initial break out and prices reverse, it would pay to reverse your position as well.