BOLLINGER BANDS
Back to GlossaryDefinition
A moving average with bands set by standard deviations to indicate volatility and extremes.
Summary
Bollinger Bands are a technical analysis tool consisting of three lines plotted on a price chart: a middle line (typically a 20-period simple moving average) and two outer bands positioned above and below the middle line at a distance of two standard deviations. The bands expand and contract based on market volatility - they widen during volatile periods and narrow during calm periods. Traders use these bands to identify potential overbought conditions (when price touches the upper band) and oversold conditions (when price touches the lower band), as well as to gauge market volatility and potential price reversals.
Usage Context
Understanding Bollinger Bands is crucial when studying technical analysis, volatility measurement, and trend identification strategies. This concept is particularly important when learning about risk management, entry and exit timing, and market psychology in trading and investment analysis courses.
Common Confusions
- Thinking that touching the upper or lower band is always a sell or buy signal
- Confusing Bollinger Bands with other envelope indicators like Keltner Channels
- Not understanding that the bands are dynamic and change with volatility
- Believing that price will always bounce off the bands
- Misunderstanding that the middle line is just a moving average
- Thinking wider bands always mean better trading opportunities
