BOLLINGER BAND
Back to GlossaryDefinition
A technical indicator of volatility consisting of a moving average with upper and lower bands set by standard deviations.
Summary
Bollinger Bands are a popular technical analysis tool that creates a visual 'envelope' around a stock's price movement. Think of it as a dynamic channel that expands and contracts based on market volatility. The bands consist of three lines: a middle line (usually a 20-period moving average) and two outer bands placed at a specific number of standard deviations (typically 2) above and below the moving average. When volatility increases, the bands widen; when volatility decreases, they narrow. Traders use these bands to identify potential overbought/oversold conditions and possible price reversals.
Usage Context
Understanding Bollinger Bands is crucial when studying technical analysis, risk management, and trading strategies. This concept is particularly important when learning about volatility measurement, entry and exit timing, and how to combine multiple technical indicators for more reliable trading signals.
Common Confusions
- Thinking that touching a band automatically means a reversal will occur
- Confusing Bollinger Bands with simple moving average channels
- Not understanding that bands are dynamic and change with volatility
- Expecting the bands to always contain 95% of price action (the statistical expectation)
- Using Bollinger Bands as the sole trading signal without confirmation
