Bollinger Bands

The Bollinger Bands indicator consists of three lines: the middle line, which is typically a 20-period simple moving average, the upper band, which is the moving average plus two standard deviations, and the lower band, which is the moving average minus two standard deviations. The width of the bands depends on price volatility: as volatility increases, the bands widen, and as the market calms, they contract.

Bollinger Bands are used in several ways: when the price touches the upper band, it is considered relatively high and potentially overbought, while touching the lower band indicates the opposite. Additionally, a squeeze points to a period of low volatility and consolidation that often precedes a strong price breakout in either direction.

Some traders employ a bounce strategy between the bands in range-bound markets, while others interpret a break beyond the bands as a strong continuation signal in powerful trending markets, a phenomenon known as "walking the band."

A common mistake is assuming that touching the upper band signals an immediate reversal, whereas the price can continue to ride along the band for extended periods during strong trends. Therefore, it is advisable to combine Bollinger Bands with a momentum indicator, such as the RSI, to confirm true overbought or oversold conditions before making a trading decision.