Bollingerbands

Bollinger Bands are a widely used technical analysis tool that assess price volatility and relative levels. They consist of three lines plotted on price data: a middle band, an upper band, and a lower band. The middle band is a simple moving average (SMA) of the price over a chosen period, most commonly 20 trading days. The upper and lower bands are drawn at a fixed number of standard deviations above and below the middle band, typically two standard deviations.

Calculation involves the middle band = SMA, upper band = SMA + k × SD, lower band = SMA − k × SD, where SD is the standard deviation of prices over the same period and k is usually 2. As volatility rises, the standard deviation increases and the bands widen; as volatility falls, the bands contract.

Interpretation centers on volatility and mean reversion. Prices often move toward the middle band after touching or crossing an outer band. Hitting the upper band can indicate overbought conditions, while the lower band can indicate oversold conditions, though these signals are not definitive. A characteristic feature is the squeeze, a period of unusually narrow bands that may precede a breakout in price direction.

Usage and limitations: Bollinger Bands are commonly complemented with other indicators, such as relative strength or momentum indicators, to confirm signals. They should not be used in isolation, as band touches alone can produce false signals. Parameter choices (period and multiplier) may be adjusted to suit different assets and timeframes.