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Bollinger Bands
Volatility bands placed above and below a moving average, widening and narrowing with market volatility.
Bollinger Bands
Created by John Bollinger, these bands adapt to market volatility and help identify overbought/oversold conditions.
Construction
- Middle band: 20-period simple moving average (SMA)
- Upper band: SMA + (2 × standard deviation)
- Lower band: SMA − (2 × standard deviation)
Key concepts
Squeeze
When bands contract tightly, volatility is low. This often precedes a significant breakout in either direction.
Walk the band
In strong trends, price can "walk" along the upper or lower band for extended periods. This is NOT necessarily a reversal signal.
Mean reversion
Price touching the outer band and reversing back toward the middle band suggests mean-reverting behavior.
Trading applications
- Use band width to gauge volatility
- Look for squeezes to anticipate breakouts
- Combine with RSI or volume for confirmation
- Avoid trading Bollinger signals alone in trending markets
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Technical
Difficulty
Beginner
Reading Time
1 min
Related Terms
Moving Average
A technical indicator that smooths price data over a specifi...
Resistance
A price level where selling pressure prevents further price...
Support
A price level where buying pressure prevents further price d...
Relative Strength Index
A momentum oscillator measuring speed and magnitude of price...
MACD
Moving Average Convergence Divergence—a trend-following mome...
Learn More
Where You'll See This
This concept appears throughout stock detail pages and financial data.