What is Bollinger Bands?
Bollinger Bands are a volatility indicator consisting of a middle band (usually a 20-period SMA) with an upper and lower band set at two standard deviations above and below the middle band.
Bollinger Bands Explained
Bollinger Bands expand during high volatility and contract during low volatility. The 'Bollinger Squeeze' — when bands contract tightly — often precedes a significant price move. Prices touching the upper band don't necessarily mean overbought, and touching the lower band doesn't necessarily mean oversold; in strong trends, prices can 'ride the bands.'
Real-World Example
A stock's Bollinger Bands have contracted to their narrowest point in three months (a squeeze). This suggests a big move is coming. When the price breaks above the upper band with volume, a trader might enter a long position with a stop at the middle band.
Related Terms
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