Bollinger Bands

A technical indicator that has become widely employed by traders in several markets, including assets, futures, and currencies. Developed by John Bollinger in the 1980s. It helps identify whether prices are high or low on a comparative basis. It is also used to measure the volatility of a financial market, and to identify an overbought or oversold condition. This tool tells us basically if the market is either quiet or loud. If the bands are wider, the volatility is high. And if it is narrow, the lower the volatility is. The bands above and below measures the volatility or the degree in differences in costs over time. Bollinger bands automatically adjust the market conditions. They are rather simple to understand and are extremely well-known to experts and at-home traders.

What are the Bollinger Bands?

The Bollinger Bands are consist of three lines: an upper, a middle, and a lower band. The middle line is a simple moving average (SMA). It serves as a base for the lower and upper bands. Most charting programs use 20 periods as the default. Later on when you get used to using the Bollinger Bands, then you can experiment with different moving average lengths. By default, the upper and lower bands portray two standard deviations away from the SMA. Though you can usually have it adjusted as well.

If you are not familiar with standard deviations, let us discuss it. Standard deviation is a measure of how numbers are spread out. If the lower and upper bands are 1 standard deviation, this signifies about 68% costs that recently occurred are inside the bands. The higher the SD value you use, the more cost the bands captures. Once you get more used to this strategy, you can try different deviations.

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