CandleFocus Glossary Editor
Bollinger Bands®, created by John Bollinger and popularized in the 1980s, are a popular and widely used technical tool used by novice and professional traders alike. Bollinger Bands® are one of the most ubiquitous technical indicators used in technical analysis and provide an excellent way to identify entry and exit points in the market.
Bollinger Bands® are composed of three lines—a simple moving average, or the middle line, and an upper and lower band. The most common setup for Bollinger Bands® is with a 20-day simple moving average and the upper and lower bands plotted 2 standard deviations +/- from this average. Although this setup is the most popular, it can be modified.
By plotting the data of the past price movements on a chart, the Bollinger Bands® help traders identify when price is ranging, overbought or oversold. When the price of a security or index continually touches the upper band of the Bollinger Band® it can indicate a possible overbought condition. As prices increase and touch or exceed the upper band, it generates an overbought signal, suggesting a pullback in price. Alternatively, when prices continually touch the lower band of the Bollinger Band® it can indicate a possible oversold condition. If the price continues to fall, eventually touching or falling below the lower band of the Bollinger Band®, it will alert investors to a potential buying opportunity as prices may be undervalued and due for a reversal.
Because there are so many data points on a Bollinger Band® trading chart, investors are able to identify the stability or volatility of a security or index. If the bands are wide then it would suggest that a security or index is volatile, while if the bands are narrow it suggests low volatility. If a security or index has experienced a long period of low volatility, it can indicate that a trend may soon follow either higher or lower.
Overall, Bollinger Bands® are a reliable technical tool which can help traders easily identify overbought and oversold levels, ranges and volatility of securities or indices. John Bollinger’s invention has become a widely used tool as it provides traders with an excellent way to identify potential entry and exit points in the market.
Bollinger Bands® are composed of three lines—a simple moving average, or the middle line, and an upper and lower band. The most common setup for Bollinger Bands® is with a 20-day simple moving average and the upper and lower bands plotted 2 standard deviations +/- from this average. Although this setup is the most popular, it can be modified.
By plotting the data of the past price movements on a chart, the Bollinger Bands® help traders identify when price is ranging, overbought or oversold. When the price of a security or index continually touches the upper band of the Bollinger Band® it can indicate a possible overbought condition. As prices increase and touch or exceed the upper band, it generates an overbought signal, suggesting a pullback in price. Alternatively, when prices continually touch the lower band of the Bollinger Band® it can indicate a possible oversold condition. If the price continues to fall, eventually touching or falling below the lower band of the Bollinger Band®, it will alert investors to a potential buying opportunity as prices may be undervalued and due for a reversal.
Because there are so many data points on a Bollinger Band® trading chart, investors are able to identify the stability or volatility of a security or index. If the bands are wide then it would suggest that a security or index is volatile, while if the bands are narrow it suggests low volatility. If a security or index has experienced a long period of low volatility, it can indicate that a trend may soon follow either higher or lower.
Overall, Bollinger Bands® are a reliable technical tool which can help traders easily identify overbought and oversold levels, ranges and volatility of securities or indices. John Bollinger’s invention has become a widely used tool as it provides traders with an excellent way to identify potential entry and exit points in the market.