What are Bollinger Bands?
Bollinger Bands is a technical analysis indicator that was developed by John Bollinger in the 1980s. It is used to measure market volatility and identify potential price trends. The indicator consists of three lines plotted on a price chart: a simple moving average (SMA) line in the middle and two outer bands plotted above and below the SMA line.
The upper and lower bands are calculated by adding and subtracting a specified number of standard deviations from the SMA line. The standard deviation is a measure of how much the prices have deviated from the mean (SMA) over a specific period of time. Typically, the standard deviation used is two, meaning that the upper and lower bands are set two standard deviations away from the SMA.
lBollinger Bands are widely used by traders to identify potential buy and sell signals. When the price moves to the upper band, it is considered overbought, and a sell signal may be generated. Conversely, when the price moves to the lower band, it is considered oversold, and a buy signal may be generated.
Bollinger Bands can also be used to identify potential trend reversals. When the bands start to narrow, it may indicate that the market is becoming less volatile, and a trend reversal may be imminent. When the bands start to widen, it may indicate that the market is becoming more volatile, and a new trend may be forming.
Overall, Bollinger Bands are a versatile technical analysis tool that can be used in a variety of ways to help traders make better-informed trading decisions.