In the financial markets, Bollinger Bands are a technical analysis technique used to measure volatility and spot possible price movements. These bands were created by John Bollinger in the 1980s and are made up of two outside bands that show standard deviations from the moving average and a middle band that is usually a simple moving average (SMA).
The average price over a given period is shown in the middle band, which acts as a baseline trend indicator. Although a 20-day SMA is typically used, traders are free to modify this period in accordance with their preferences and the features of the market
.The outer bands react dynamically to market volatility and are typically positioned two standard deviations above and below the main band. More volatility is indicated by wider bands, and less volatility is suggested by narrower bands. In order to determine possible entry or exit locations, traders frequently analyse price fluctuations in relation to the bands.
Prices that approach or cross above the upper band may be a sign of an overbought situation, implying that the asset may be overpriced and ready for a possible correction or consolidation. On the other hand, prices that approach or drop below the lower band may indicate an oversold situation, suggesting a possible undervaluation and a prospective upswing in prices.
Additionally useful for identifying trends and possible trend reversals are Bollinger Bands. Prices frequently ride the upper band in a strong rally, while they may remain around the bottom band in a decline. The bands may suddenly expand or contract, indicating upcoming market fluctuations and helping traders make well-informed decisions.
Remember that Bollinger Bands are not reliable and that other technical indicators and analysis techniques should be employed in addition to them. To effectively read and apply Bollinger Bands in trading techniques, one must also have a thorough awareness of the particulars of the asset being studied as well as the state of the market.