Bollinger Bands
are an oscillating indicator that measures volatility and identifies overbought and oversold levels relative to the average price.
Structure of the Indicator
Bollinger Bands consist of three lines:
Middle band: a Simple Moving Average (SMA), usually set to 20 periods.
Upper band: SMA + standard deviation (a “high” price level).
Lower band: SMA – standard deviation (a “low” price level).
How to Read Bollinger Bands
Price near the upper band → the market is overbought, a pullback downward may follow.
Price near the lower band → the market is oversold, a rebound upward may follow.
Price near the middle band → a return to the average price.
⚠️ Important: Touching a band does not guarantee a reversal. Always confirm signals with other indicators or candlestick patterns.
Volatility
Narrow bands: low volatility (market “squeezes”), often before a strong move.
Wide bands: high volatility (active movement).
Settings
1. Period (default: 20)
Lower than 20 → reacts faster, more breakouts, but more false signals.
Higher than 20 → reacts slower, fewer but more reliable signals.
2. Standard deviation (default: 2)
Lower than 2 → bands are closer, price breaks them more often.
Higher than 2 → bands are wider, price breaks them less often (more reliable signals).
Key Signals
Touching the upper band → potential sell (with confirmation).
Touching the lower band → potential buy (with confirmation).
Band squeeze → market preparing for a strong move.
Band expansion → trend is becoming more volatile.
Applications
Identifying overbought/oversold zones.
Finding entry and exit points (bounces or breakouts).
Measuring current market volatility.
Combining with other indicators (e.g., RSI or candlestick patterns) for confirmation.
Conclusion:
Bollinger Bands are a versatile tool for analyzing volatility and spotting potential trading opportunities. They work best when combined with other indicators to filter false signals.