Bollinger Bands
The Bollinger Bands indicator is a technical analysis tool that measures the volatility of an asset by plotting two standard deviations away from a simple moving average (SMA) of the asset's price. The default time period for the Bollinger Bands indicator is 20 periods, but it can be adjusted based on the trader's preferences.
To create Bollinger Bands, the following steps are taken:
Calculate the simple moving average of the asset's price over a specified period (typically 20 periods).
Calculate the standard deviation of the asset's price over the same period.
Plot two lines that are a specified number of standard deviations away from the SMA. The default is two standard deviations.
The upper and lower Bollinger Bands indicate the range within which the price of the asset is likely to fluctuate. When the price moves outside of the Bollinger Bands, it is considered a potential buying or selling opportunity.
Traders can use Bollinger Bands in a variety of ways. For example, when the price of an asset moves above the upper Bollinger Band, it is considered overbought, and when it moves below the lower Bollinger Band, it is considered oversold. These conditions can signal potential buying or selling opportunities. Additionally, traders can look for "squeeze" patterns, where the Bollinger Bands contract tightly around the price, indicating a potential impending price breakout.
Crossing above and below the 20-period simple moving average (SMA) can be considered bullish and bearish signals when using Bollinger Bands. When the price of an asset crosses above the 20-period SMA and the upper Bollinger Band, it is considered a bullish signal. Conversely, when the price crosses below the 20-period SMA and the lower Bollinger Band, it is considered a bearish signal. These signals can be used by traders to make decisions on buying or selling an asset. However, as with any technical indicator, It's important to note that Bollinger Bands should be used in conjunction with other technical or fundamental analysis to confirm potential trading opportunities.
