Bollinger Bands
Bollinger Bands are volatility bands placed above and below a moving average. They expand when volatility increases and contract when volatility decreases, helping traders identify overbought/oversold conditions and potential breakouts.
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Bollinger Bands consist of three lines: a middle band (20-period SMA), an upper band (SMA + 2 standard deviations), and a lower band (SMA - 2 standard deviations). About 95% of price action typically stays within the bands.
Key Features
Trading Signals
- →Price touching upper band - potentially overbought
- →Price touching lower band - potentially oversold
- →Band squeeze often precedes significant moves
- →Price breaking out of squeeze indicates direction
- →Walking the bands in strong trends
Best Used For
Limitations to Consider
- ⚠Price can 'walk the bands' in strong trends
- ⚠Touching a band doesn't guarantee reversal
- ⚠Works best with other confirmation
- ⚠Default settings may not suit all markets
Bollinger Bands FAQs
Common questions about bollinger bands
A squeeze occurs when the bands contract close together, indicating low volatility. This often precedes a significant price move. Traders watch for price to break out of the squeeze to determine direction.
Not automatically. In strong uptrends, price can 'walk' along the upper band for extended periods. Use other confirmation like RSI or candlestick patterns before acting.
The default settings (20-period SMA, 2 standard deviations) work well for most traders. Some use tighter bands (1.5 SD) for more signals or wider bands (2.5 SD) for fewer, more significant signals.
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Disclaimer: Charted provides technical analysis for educational purposes only. This is not financial advice. All trading involves risk. Always consult a licensed financial professional before making investment decisions.
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