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What are Bollinger Bands?

Bollinger Bands are a technical indicator developed in the 1980s by John Bollinger. Bollinger Bands are a type of chart indicator for technical analysis and have become widely used by traders in many markets, including stocks, futures, and currencies. The indicator forms a channel around the price movements of an asset. The channels are based on standard deviations and a moving average. Bollinger bands can help you establish a trend's direction, spot potential reversals, and monitor volatility.

How the Bollinger Bands Work?

Bollinger Bands are technical tools that give traders a predictive idea of where the market is moving based on prices.

Bollinger bands use three lines: the upper band, the middle band (moving average), and the lower band. When prices approach the upper band, it signals that the market may be overbought, on the contrary, when prices approach the lower band, it signals that the market may be oversold.

The middle band is the section where the moving average of prices is taken. The parameters of the moving average are chosen by investors on their own initiative. Upper and lower bands are drawn on both sides of the moving average. The distance between the upper and lower band is determined by calculating with standard deviations. The standard deviations vary depending on the volatility, and the rise or fall affects the standard deviation.

Why Are Bollinger Bands Important?

  • Bollinger Bands are a technical analysis tool developed by John Bollinger for generating oversold or overbought signals.

  • There are three lines that compose Bollinger Bands: A simple moving average (middle band) and an upper and lower band.

  • The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average, but they can be modified.

  • Bollinger bands are technical indicators that form a channel around the price movements of an asset.

  • Bollinger bands help assess how strongly an asset is rising and when the asset is potentially losing strength or reversing.

How is Bollinger Bands Calculated?

  • Middle Band: 20-day simple moving average

  • Upper Band: 20-day simple moving average + (standard deviation of 20-day price x 2)

  • Lower Band: 20-day simple moving average - (standard deviation of 20-day price x 2)

Bollinger bands are just a technical analysis indicator tool. Like other technical analysis indicators, it may not always give 100% reliable signals. Technical analysis indicators can often help you stay on the right side of the trend as much as possible and spot potential reversals. For this reason, the random or default setting in the indicators may not always work with clear results. Adjusting your indicator and performing back tests according to your active strategy will help you achieve better results.