What is bollinger bands


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Bollinger Bands are a technical analysis tool used to gauge the volatility of a stock's price and to identify potential overbought or oversold conditions. They were developed by financial analyst John Bollinger in the 1980s and are based on a simple moving average (SMA) and standard deviations.
- Composition: Bollinger Bands consist of three lines plotted on a price chart:
- The middle line is typically a 20-day SMA of the closing prices, representing the intermediate-term trend.
- The upper band is calculated by adding two standard deviations to the SMA.
- The lower band is calculated by subtracting two standard deviations from the SMA.
- Volatility Measurement: The distance between the bands adjusts to volatility swings in the underlying price. During periods of high volatility, the bands widen; during periods of low volatility, they contract.
- Trading Implications:
- Traders often view stocks as overbought when the price nears the upper band and oversold when it approaches the lower band, suggesting potential trading opportunities.
- The bands can also indicate the strength of a trend, with wider bands indicating higher volatility and narrower bands indicating lower volatility.
- Limitations: While Bollinger Bands are widely used, they are considered a secondary indicator and should be used in conjunction with other analysis methods. They do not provide definitive buy or sell signals but rather help traders confirm trends and potential entry and exit points.
In summary, Bollinger Bands are a versatile tool for assessing market volatility and aiding in trading decisions, but their signals should always be corroborated with additional analysis techniques.
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