What are Bollinger Bands: A measure of the volatility of price movement, Bollinger Bands are simply two lines typically plotted two standard deviations (one above and one below) from a simple moving average. Their primary purpose is to measure the deviation of price away from its mean average over a given past period of time.
Category: Technical analysis indicator
How are Bollinger Bands Used: Bollinger Bands are used for several different purposes. Trade entries and exits can be determined through the use of the bands. Often, traders will trade against a price move using a “reversion to the mean” strategy once price reaches out to one of the 2SD (2-standard-deviation) lines. The assumption is that price has traded too far away from its recent average, and should correct back. Other traders may use the Bollinger Bands as a trend-following tool. As price hits one of the bands, those traders may wish to trade in the direction of the move. Additionally, there is a technique called the Bollinger Band Squeeze. In this strategy, after the bands converge the trader would watch for a volatility breakout in either direction from low volatility to high volatility.
What Do Bollinger Bands Consist of: Bollinger Bands are typically overlaid directly on top of a price chart. The bands show the 2-standard-deviation boundaries away from a simple moving average. Most often, the moving average used is 20 periods. In the case of a daily chart, it would be 20 days. There are generally three lines displayed, with the two outer lines representing the actual Bollinger Bands.
What Do Bollinger Bands Look Like:
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