What is Bollinger Band?

Bollinger Bands are a technical analysis tool used to measure a security's volatility and identify potential price trends. The tool was developed by John Bollinger in the 1980s.

Bollinger Bands consist of three lines: a simple moving average (SMA) line in the middle, and an upper band and a lower band that are positioned a certain number of standard deviations away from the SMA line. Typically, the standard deviation used is two, meaning that the upper and lower bands will be positioned two standard deviations away from the SMA line.

The distance between the upper and lower bands will vary based on the volatility of the security being analyzed. When volatility is high, the bands will widen, and when volatility is low, the bands will narrow.

Traders often use Bollinger Bands to identify potential buy and sell signals. For example, if the price of a security is trading near the upper band, it may indicate that the security is overbought, and traders may consider selling. Conversely, if the price is trading near the lower band, it may indicate that the security is oversold, and traders may consider buying. However, it's important to note that Bollinger Bands should be used in conjunction with other technical indicators and not relied on as the sole indicator for making trading decisions.