Bollinger Bands are a tool developed by John Bollinger in the 1980s. They are used to measure a market's volatility and provide a relative definition of high and low prices.
Here's how they work:
Bollinger Bands consist of three lines plotted on a price chart: a simple moving average (SMA) in the middle, an upper band, and a lower band.
The middle band is a 20-day SMA, although this can be adjusted based on the trader's preferences.
The upper and lower bands are set 2 standard deviations above and below the SMA. Standard deviation is a statistical measure of volatility.
The bands automatically widen when volatility increases and contract when volatility decreases.
Bollinger Bands can be used in several ways:
Overbought/Oversold conditions: When the price touches the upper band, it might indicate that the market is overbought, and when it touches the lower band, it might be oversold.
Breakouts: When the price breaks out of the bands, it can signal the start of a new trend.
Squeezes: When the bands contract, it indicates that volatility has decreased, and that a period of increased volatility may be imminent.
However, Bollinger Bands should not be used in isolation. Traders often use them in conjunction with other technical indicators to confirm signals.
Bollinger Bands are a useful tool for traders to gauge market volatility and potentially spot opportunities. They provide a dynamic visual representation of price action and can help identify potential overbought or oversold conditions, breakouts, and volatility squeezes.
How to use BB?
In simple mechanic, it compresses then expand. It keeps doing this until it breaks out of the bands to form a new range.