Bollinger Bands
What Are Bollinger Bands?
Bollinger Bands are a technical analysis indicator that traders use to assess price volatility and potential trading opportunities. The indicator consists of three lines: a middle line that represents a moving average, and two outer bands that are plotted at a set distance above and below this middle line. As an example, if Bitcoin’s 20-day moving average is $50,000, the upper and lower bands might be positioned $2,000 above and below this price.
The indicator was created by John Bollinger in the early 1980s. The distance between the bands is calculated using standard deviation, which measures how much prices typically vary from the average. When prices are more volatile, the bands widen. When prices are stable, the bands narrow. As a result, Bollinger Bands are popular among crypto traders because they provide a visual representation of both trend direction and market volatility.
How Do Bollinger Bands Work?
Bollinger Bands help traders identify several market conditions. When an asset’s price touches or moves outside the upper band, it may indicate that the asset is overbought and could be due for a price decline. Conversely, when the price touches or moves below the lower band, it may suggest the asset is oversold and could be due for a price increase.
The width of the bands also provides important information. Narrow bands often indicate low volatility and the potential for a significant price move, while wide bands suggest high volatility and potentially unstable market conditions. Many traders also watch for “band squeezes,”-periods when the bands contract significantly, as these often precede major price movements.
The middle line acts as dynamic support or resistance, with prices often bouncing off this moving average during trending markets. However, when prices consistently stay above or below the middle line, it can indicate a strong trend in that direction.
Bollinger Bands are lagging indicators, which means they reflect past price movements and aren’t necessarily useful for market predictions. As a result, many traders combine Bollinger Bands with other technical indicators to improve their analysis.
