Updated on March 8, 2023
Bollinger Bands are a technical analysis indicator that consists of a moving average and two standard deviation lines that are plotted above and below the moving average. The bands are used to measure volatility and to identify potential buy and sell opportunities. When the price of an asset moves outside of the upper band, it may be considered overbought, and when it moves outside of the lower band, it may be considered oversold. The space between the two bands is known as the “bandwidth,” which can be used to identify changes in volatility.
What do Bollinger bands tell traders?
Bollinger Bands tell traders several things
The distance between the upper and lower bands can be used to measure volatility. When the bands are far apart, volatility is high, and when they are close together, volatility is low.
Potential buy and sell signals
When the price of an asset moves outside of the upper band, it may be considered overbought and a potential sell signal. Conversely, when the price moves outside of the lower band, it may be considered oversold and a potential buy signal.
When the price is trending strongly and consistently, it will remain close to one of the bands and move away from the other.
A price breakout above or below the bands can be used as a potential signal to enter or exit a trade.