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Bollinger Bands measure market volatility, as well as overbought and oversold conditions. They consist of three lines: a SMA (the middle band) and an upper and lower band. The settings can vary, but typically the upper and lower bands are two standard deviations away from the middle band. As volatility increases and decreases, the distance between the bands also increases and decreases.

Generally, the closer the price is to the upper band, the closer the asset may be to overbought conditions. Conversely, the closer the price is to the lower band, the closer it may be to oversold conditions. For the most part, the price will remain within the bands, but on rare occasions it may exceed them or fall below them. While this event may not be a trading signal in itself, it can act as an indication of extreme market conditions.

Another important concept of the bands is called a squeeze. It refers to a period of low volatility, where all the bands come very close to each other. This can be used as an indication of possible future volatility. Conversely, if the bands are very far apart, a period of lower volatility may follow.