Bollinger Bands

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Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. The indicator consists of three bands.
The middle line is the simple moving average, normally set as a period of 20 (number of bar/ticks in a given time period), and is used as a base to create upper/lower bands. The upper band is the middle band added to the given deviation multiplied by a given period moving average. The lower band is the middle band subtracted by the given deviation multiplied by a given period moving averages.
It used for determining whether current values of a data field are behaving normally or breaking out in a new direction also for identifying when trend reversals may occur.
Using Bollinger Bands
1) Trend – When price moves outside of the bands, it is believed that the current trend will continue.
2) Volatility- The band will expand/contract as the price movement becomes more volatile/or becomes bound into tight trading patterns, respectively.
3) Determine Oversold/Overbought Conditions – When price continues to hit upper band, the price is deemed overbought (may suggest sell). When price continues to hit lower band, the price is deemed oversold (may suggest buy).

J Welles Wilder has developed the Average Directional Index (ADX) to define trend force, whether the trend will develop further or will gradually weaken.

The simplest trading method based on the system of directional movement implies comparison of two direction indicators: the 14-period +DI (yellow) one and the 14-period –DI (Green). To do this, one either puts the charts of indicators one on top of the other, or +DI is subtracted from -DI. W. Wilder recommends buying when +DI is higher than -DI, and selling when +DI sinks lower than -DI.
To these simple commercial rules Wells Wilder added "a rule of points of extreme". It is used to eliminate false signals and decrease the number of deals. According to the principle of points of extreme, the "point of extreme" is the point when +DI and -DI cross each other.

- If +DI raises higher than -DI, this point will be the maximum price of the day when they cross.
- If +DI is lower than -DI, this point will be the minimum price of the day they cross.

The point of extreme is used then as the market entry level.
Thus, after the signal to buy (+DI is higher than -DI) one must wait till the price has exceeded the point of extreme, and only then buy.
However, if the price fails to exceed the level of the point of extreme, one should retain the short position.