Bollinger Bands: A technical tool for analyzing financial markets
Bollinger Bands is a technical analysis tool used to measure market volatility and identify trends. This indicator was developed by John Bollinger in the 1980s and is considered one of the most common and widely used technical indicators in financial markets.
How do Bollinger Bands work?
The Bollinger Bands indicator consists of three main lines:
- Middle Band: Simple Moving Average (SMA) for a 20-day period.
- Upper Band: Simple Moving Average + Two standard deviations from the moving average.
- Lower Band: Simple Moving Average - Two standard deviations from the moving average.
When the price moves above the upper band, it indicates a strong bullish trend. When the price moves below the lower band, it indicates a strong bearish trend.
Uses of Bollinger Bands
- Identifying Trends: Bollinger Bands can be used to identify bullish and bearish trends in the market.
- Identifying Volatility: The indicator can be used to measure market volatility, where the expansion of the bands indicates increased volatility, while the contraction of the bands indicates decreased volatility.
- Identifying Entry and Exit Points: The bands can be used as support and resistance to identify entry and exit points for trades.
Trading Strategies Using Bollinger Bands
- Buying: When the price touches the lower band and returns to an upward trend.
- Selling: When the price touches the upper band and returns to a downward trend.
- Range Trading: When the price moves between the upper and lower bands, one can buy at the lower band and sell at the upper band.
In conclusion
Bollinger Bands is a powerful technical tool that can be used to analyze financial markets and identify trends and volatility. The indicator can be used to identify entry and exit points for trades, improving trading strategies.