Bollinger Bands are a popular technical analysis tool used by traders to assess market volatility and predict price movements. Developed by John Bollinger in the 1980s, they are based on the concepts of moving averages and standard deviation, allowing them to adapt to changing market conditions.
The indicator consists of three lines: the middle line (usually a 20-period simple moving average, SMA) and two outer bands - the upper and lower bands. The outer lines are calculated by adding and subtracting the standard deviation (usually a multiplier of 2) from the middle line. This means that the bands expand during high volatility and contract when the market is calm.
The primary purpose of Bollinger Bands is to identify overbought and oversold zones. If the price of an asset approaches the upper band, it may indicate overbought conditions, while approaching the lower band may indicate oversold conditions. However, these signals do not always mean an immediate reversal: in strong trends, the price can "ride" along the bands for an extended period.
Traders also pay attention to the narrowing of the bands, known as "squeeze" (Bollinger Squeeze). It often precedes significant price movement, although it does not indicate direction. To clarify signals, Bollinger Bands are combined with other indicators, such as RSI or MACD.
The advantages of the tool are its simplicity and flexibility, as it is suitable for various markets: from stocks to cryptocurrencies. However, there are also drawbacks: during periods of low volatility or chaotic movements, signals can be false. Therefore, it is important to use confirmations from other sources.
Bollinger Bands are not a "magic wand", but when applied correctly, they help traders make informed decisions. They remind us that success in trading depends on discipline, analysis, and understanding of market dynamics.