Bollinger Bands - One of the Most Famous Technical Analysis Tools

What is the Bollinger Bands Indicator?

The Bollinger Bands Indicator is one of the most famous technical analysis tools created by financial analyst John Bollinger in the 1980s. It is used to measure market volatility and identify potential entry and exit points.

How does it work?

The Bollinger Bands Indicator consists of three main lines:

Middle Band: This is a simple moving average (SMA) of 20 candles typically.

Upper Band: It is calculated by adding two standard deviations to the moving average.

Lower Band: It is calculated by subtracting two standard deviations from the moving average.

What does the indicator tell us?

When the price approaches the upper band, it means that the market may be in a state of overbought.

And when it approaches the lower band, it may be in a state of oversold.

A narrow Bollinger Band indicates a period of calm in the market and may precede a strong price movement.

While a widening band indicates high volatility.

How do traders use it?

Some use it as a reversal signal: for example, if the price touches the lower band and then rises, it may be a buying opportunity.

Others use it to confirm trends with other indicators like RSI or EMA.