Bollinger Bands are a technical analysis tool used to measure market volatility and identify potential overbought or oversold conditions. Developed by John Bollinger in the 1980s, the indicator consists of three lines plotted over a price chart. The middle line is typically a 20-period simple moving average. The upper and lower bands are set at two standard deviations above and below this moving average.
When markets become volatile, the bands widen. During periods of low volatility, the bands contract. Traders often look for a squeeze, which occurs when the bands move close together, suggesting a period of low volatility that may precede a significant price breakout. When prices touch the upper band, some traders consider the asset overbought. When prices touch the lower band, it may be viewed as oversold.
Bollinger Bands do not provide signals in isolation. They function best when combined with other indicators like volume or the Relative Strength Index. Trading involves significant risk, and past performance does not guarantee future results. Beginners should practice on a demo account to understand how price action interacts with these bands before committing capital to live markets.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.