#Bollinger Bands are a popular technical analysis tool that can help traders identify price trends, volatility, and potential trading opportunities. They consist of three lines: a simple moving average (SMA) of the price, and two bands above and below the SMA that are based on the standard deviation of the price movements. The standard deviation is a measure of how much the price varies from the average. The bands widen when the price is more volatile, and narrow when the price is more stable. Here are some key points about Bollinger Bands:
- The default settings for Bollinger Bands are a 20-period SMA and two bands that are two standard deviations away from the SMA. However, these settings can be adjusted according to the preferences and objectives of the trader
- Bollinger Bands can be used to identify overbought and oversold conditions, as well as trend reversals and breakouts. When the price touches or exceeds the upper band, it may indicate that the price is overbought and due for a pullback. When the price touches or falls below the lower band, it may indicate that the price is oversold and due for a bounce. When the price moves above or below the SMA, it may signal a change in the direction of the trend. When the bands squeeze together, it may indicate that the price is consolidating and preparing for a breakout
Bollinger Bands can also be used to generate trading signals based on various patterns and indicators. For example, some traders use the RSI indicator in conjunction with Bollinger Bands to identify divergence, failure swings, and trend signals. Some traders also look for wedge patterns, candlestick patterns, and chart patterns that form within or outside the bands to confirm entry and exit points
Bollinger Bands are a versatile and useful tool for technical analysis, but they are not infallible. They should be used in combination with other tools and methods, such as fundamental analysis, risk management, and trading psychology. As John Bollinger himself said, "Bollinger Bands are a guide, not a gospel.