Bollinger Bands are a technical analysis tool for stock trading established by John Bollinger in the 1980s. The bands are part of a volatility indicator that gauges how high or low a security’s price is in comparison to past trades. Volatility is quantified using standard deviation, which fluctuates when volatility rises or falls. When the price rises, the bands broaden, and when the price falls, the bands narrow. Bollinger Bands may be used to trade a variety of instruments, including forex, bitcoin, gold, and oil, due to its dynamic nature.
How this indicator works
• When the bands narrow during a period of low volatility, the probability of a sharp price move in either direction increases. This could be the start of a trend. Keep an eye out for a false move in the opposite way that reverses before the true trend begins.
• When the bands diverge by an unusually high amount, volatility rises, and any current trend may come to an end.
• Prices tend to bounce within the envelopes of the bands, touching one band then going to the other. These swings can be used to help you discover potential profit objectives. If a price bounces off the lower band and subsequently crosses above the moving average, the higher band becomes the profit objective.
• During strong trends, price might surpass or hug a band envelope for extended periods of time. When a momentum oscillator diverges, you may want to perform more study to see if taking additional profits is a good idea for you.
• When the price breaks out of the bands, a significant trend continuation is likely. However, if prices quickly return to within the band, the indicated strength is null and void.
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