Bollinger Bands® is a commonly used technique in technical analysis, formulated by John Bollinger in the 1980s. This indicator consists of three lines drawn on a price chart that represents different levels of price volatility. The lines include the Simple Moving Average line, an upper band, and a lower band.
The Simple Moving Average (SMA) line is calculated based on a specific number of periods, usually 20. The Upper and Lower Bands are plotted two standard deviations away from the moving average line. The concept behind Bollinger Bands® is that price tends to return to the moving average line.
Bollinger Bands® vary in distance from the SMA line based on the volatility of the market. In periods of high volatility, the bands widen, and during low volatility, they contract. When prices touch or cross the upper band, it could be seen as a sell signal or an overbought condition. If prices touch or breach the lower band, it could imply a buying signal or oversold condition.
However, rather than using these crossings as entry/exit points, most traders use Bollinger Bands® to understand the direction and strength of the trend, and for potential warning signs of changes in the trend’s direction. This technical analysis tool is used in several markets like stocks, commodities, cryptocurrencies, and forex markets.
Remember, using Bollinger Bands® or any technical analysis tool should not be done in isolation, but rather in conjunction with other indicators for more accurate predictions.
