Bollinger Bands are a technical analysis tool created by John Bollinger that consists of three lines plotted on a price chart. The middle line is a simple moving average (SMA) of the asset’s price, while the upper and lower bands are calculated by adding and subtracting a specified number of standard deviations from the SMA. This construction allows traders to gauge volatility and potential price movements. Generally, when the bands widen, it indicates increased volatility, while contractions may signal reduced volatility and potential market reversals. Traders often utilize Bollinger Bands to identify overbought or oversold conditions, aiding in the timing of entries and exits in the market.
Technical Analysis