What are Bollinger bands and how to use them?
Bollinger Bands are a very popular tool in technical analysis and are used to measure the volatility of stock prices. It was developed by John Bollinger in the early 1980s.
Bollinger Bands are typically plotted over a stock's 20-day moving average. The upper and lower bands are drawn above and below the moving average by a certain amount of standard deviation. Standard deviation measures how fast price changes, which in turn measures volatility.
When the stock price approaches the upper band, the stock is considered overbought and the price is likely to decline.
Similarly, when the stock price approaches the lower band, the stock is considered to be oversold and the price is likely to rise.
Bollinger Bands consist of three separate bands: -
The middle band refers to the 20-day simple moving average of an asset.
- The upper and lower bands are drawn using 20-day standard deviations.
1️⃣Middle band: 20-day simple moving average
2️⃣Lower band: 20-day simple moving average – (20-day standard deviation x2)
3️⃣Upper band: 20-day simple moving average + (20-day standard deviation x2)
About the use of Bollinger Bands, Bollinger Bands expand when volatility is high and narrow when volatility is low.
Widening of the bands indicates that the market is on the verge of consolidation or trend change. The narrowing of the bands indicates that there is a high probability of a sharp price movement in the near future.
If the price touches the upper band several times, that area is a strong resistance, and similarly, if it bounces from the lower band a few times, that area is a strong support area.
I hope this information will be useful, dear friends.
