What are Bollinger Bands and why are they important?
Bollinger Bands are like radar for traders. They help you see if the price of an asset is too high or too low compared to its normal behavior. Imagine them as the lines on a road: if the car (the price) goes off the rails (the bands), it could indicate a change of direction.
How do they work?
There are three lines: one in the middle (the moving average) and two on the sides (the bands). These bands adjust according to the volatility of the market. If the market is very active, the bands move apart; if it is calm, they come together.
What are they for?
Buy and sell signals: When the price touches the lower band, it could be a buy signal (if the price is "cheap"). If it touches the upper band, it could be a sell signal (if the price is "expensive").
Identify trends: If the price moves within the bands without breaking them, it could indicate a sideways market. If it breaks a band and stays above or below it, it could indicate an uptrend or a downtrend.
For example:
Imagine you are following the price of Bitcoin. If the price touches the upper band and then quickly drops, it could be a sign that traders are selling and the price could continue to fall.
Be careful!
Bollinger Bands are a useful tool, but not a crystal ball. Always combine this indicator with other analysis and consider fundamental factors before making decisions.
