Bollinger Bands: An Introduction

As a trader or investor, you should always consider using indicators to help you make informed decisions on when to buy or sell. One popular indicator is Bollinger Bands, which is named after its creator, John Bollinger. Bollinger Bands are used to measure the volatility of a stock or other asset and show how far the price of the asset is from its moving average. This blog will cover the basics of Bollinger Bands and how they can be used in trading strategies.

What are Bollinger Bands?

Bollinger Bands are made up of three lines, which are plotted on a chart on top of a security or asset's price data. These lines include:

• The upper band, which is two standard deviations above the 20-period moving average
• The lower band, which is two standard deviations below the 20-period moving average
• The moving average, which is the average price of the asset over the past 20 periods

The distance between the upper and lower bands can be interpreted as the level of volatility of the asset. When the bands are closer together, it indicates lower volatility, while wider bands indicate higher volatility.

Using Bollinger Bands in Trading Strategies

Now that you understand what Bollinger Bands are, how can you use them in your trading strategies? Here are a few ways:

1. Identifying Breakouts

When the price of an asset moves outside of the upper or lower Bollinger Band, it is considered a breakout. This can be an indication that the asset's price is about to trend in the direction of the breakout. Traders can then buy or sell accordingly, depending on whether it's a breakout above the upper band or below the lower band.

2. Confirming Trends

Another way to use Bollinger Bands is to confirm trends. If the price of an asset is consistently moving in one direction and the bands are widening as well, it's an indication that the trend is strong. On the other hand, if the price is moving in one direction but the bands are narrowing, it could be a sign that the trend is weakening.

3. Finding Overbought or Oversold Conditions

Bollinger Bands can also be used to find when an asset is overbought or oversold. If the asset's price is touching or going above the upper band, it indicates an overbought condition. Conversely, when the price is touching or going below the lower band, it indicates an oversold condition. These conditions can be an indication that a reversal could be coming soon.

Conclusion

Bollinger Bands are a popular indicator used by traders to measure volatility and identify trends in an asset's price movement. They can be used in a variety of trading strategies to help make informed buying and selling decisions. Now that you have a basic understanding of what Bollinger Bands are and how they can be used, consider incorporating them into your own trading strategies.