The Basics Of Bollinger Bands
Bollinger bands are a technical analysis tool invented by John Bollinger, a long time technician of the markets, in the 1980's.
They are used to measure a markets volatility and can be used to measure the highs and lows of price relative to previous trades.
Some traders would say that they measure the noise of the market so as in our example below if the band width is small there isn't much noise in the market but if the band width is wide there is a lot of noise.
A bollinger band consists of a center line
and two price channels (bands) one above and one below it. The bands will expand and as price becomes volatile or as price shrinks to more of a tight trading range the bands will contract and that's all there is to it really. We could go on to blow your mind with how it is calculated with the mathematical formulas behind it, but in all honesty you don't need that and lets be frank most are not interested. You just want to know how to use them and can they help your trading.....right!!! Well ok for all those who are really into the math behind them you can go check that out at
For the rest of us "normal" people the use of a these band varies among traders.
Some traders buy when price reaches the lower band and exit when price reaches the moving average in the center of the bands. They would sell when price reaches the upper band and then buy price reaches the moving average in the center of the bands. This is commonly could the Bollinger Bounce. As you can see in the chart below price tends to return to the center of the bands, the moving average in the middle.
Other traders buy when price breaks above the upper band or sell when price falls below the lower band. This would be preceded by what is commonly referred to as the Bollinger Squeeze. As you can see by the chart below as soon as the price started to break the upper band it shot up.
There are other ways to use the bollinger bands but these two are by far the two most common strategies and they have made this one of the most commonly used tools in the traders tool box of charting indicators.
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