What is the Bollinger Bands Indicator?

Bollinger Bands are a popular technical analysis tool developed by John Bollinger. They consist of a middle band (a simple moving average), an upper band, and a lower band. The bands are plotted two standard deviations away from the moving average, which helps in identifying overbought and oversold conditions in the market.

How Bollinger Bands are Calculated

The middle band is typically a 20-day simple moving average (SMA). The upper band is calculated by adding two standard deviations to the SMA, while the lower band is calculated by subtracting two standard deviations from the SMA.

Using Bollinger Bands in Trading

Traders use Bollinger Bands to determine whether prices are high or low on a relative basis. Here are some common uses:

• Overbought and Oversold Conditions: When the price touches the upper band, it is considered overbought. When it touches the lower band, it is considered oversold.
• Bollinger Band Squeeze: This occurs when the bands come close together, indicating low volatility. It often precedes a significant price movement.
• Trend Identification: Prices moving along the upper band indicate an uptrend, while prices moving along the lower band indicate a downtrend.

Developing Strategies with Bollinger Bands

Traders often use Bollinger Bands in combination with other indicators to develop trading strategies. Backtesting these strategies on historical data helps in refining and improving their effectiveness.