BOLLINGER BANDS Meaning and
Definition
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Bollinger Bands are a technical analysis tool used in financial markets to determine the volatility and potential price range of a security or asset. Created by John Bollinger, these bands consist of a central moving average line, typically based on 20 periods, and two standard deviation lines placed above and below the moving average.
The central moving average line represents the average price of the asset over a defined period, providing a clear indication of the trend. The standard deviation lines, also known as Bollinger Bands, are plotted at a set number of standard deviations away from the moving average. Typically, the bands are placed two standard deviations away from the moving average.
These bands act as dynamic support and resistance levels. When the price moves towards the upper band, it suggests that the asset is becoming overbought, increasing the probability of a reversal or a price correction. Conversely, as the price approaches the lower band, the asset may be oversold, indicating a higher likelihood of a price rebound or reversal to the upside.
Bollinger Bands are particularly useful in identifying periods of low volatility, known as the Bollinger Squeeze, where the bands narrow closely together. This often precedes a significant and potentially explosive price breakout in either direction.
Traders and investors use Bollinger Bands to anticipate price movements, identify trading opportunities, and set appropriate stop-loss or take-profit levels. By gauging the width between the upper and lower bands, analysts can determine the current level of volatility and adjust their strategies accordingly.
Etymology of BOLLINGER BANDS
The word "Bollinger Bands" is derived from the name of its creator, John Bollinger, who introduced this technical analysis tool in the 1980s. Bollinger Bands are a popular tool used to analyze financial markets and understand the volatility and potential price movement of a security or asset. The term "Bollinger" comes from John Bollinger's surname, while "Bands" refers to the lines that are plotted on a price chart to visually represent the volatility and potential trading range of the asset.
