What are Bollinger bands?

Bollinger bands are a technical analysis tool that helps define the range within which an asset is supposed to trade. It was developed by well-known technical trader, John Bollinger.

Bollinger bands consist of a middle band with two outer bands. The middle band is a simple average. The upper band and lower band are plotted at a standard deviation level above and below the moving average.

The default Bollinger bands on Webull consist of a 20-d moving average and two bands plotted at a standard deviation level of 2. Investors can customize the settings according to their needs.

What can we learn from Bollinger bands?

Bollinger bands give investors information on future volatility, whether prices are high or low on a relative basis, how strong a trend is, etc.

Volatility

Standard deviation measures volatility. When the asset price becomes more volatile, the distance between the bands widens. When the asset price becomes less volatile, the distance narrows.

One important concept in Bollinger bands is squeeze. When the upper and lower bands move close together, a squeeze occurs. A squeeze represents low volatility. It is believed that following the squeeze, the bands will separate remarkably. Investors may need to watch for a dramatic price change next. Conversely, the wider the bands are, the more likely that price will stabilize.

Price level

Another component of Bollinger bands is that on a relative basis, price is high at the upper band and low at the lower band. So, when the price moves closer to the upper band, the asset is overbought. When the price moves closer to the lower band, the asset is oversold. Some investors may want to sell in the upper band area and buy in the lower band area.

Breakouts

In practice, approximately 90% of the price actions occur within the bands. When the price moves out of the bands, it’s called a breakout. Breakouts are continuation signals. If the price breaks through the upper or lower band, it’s likely that the trend will continue. However, if the price moves back into the range immediately, it means the trend momentum is weakened.

Limitations of Bollinger bands

Bollinger bands can be risky if used as a standalone indicator. They simply provide information to help investors determine the volatility and price level of an asset. They do not provide direct trading signals. It’s recommended that investors use Bollinger bands together with other indicators, as well as fundamental analysis.

Get a Heads-Up When Technical Signals Appear

Watching prices can be time-consuming. One simple way to watch a price efficiently is by setting a customized price alert. Check below to see how.

*Finally, please note that technical analysis is never 100% accurate. The interpretation of results is subjective. Please ensure the strategy being used is suitable for your risk tolerance.

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