202211281558 - Bollinger Bands

Title: What are Boillinger Bands
URL: https://www.webullapp.com/learn/vbtL5U/XI2xVj/Bollinger-Bands?source=email
author: WeBull Learn
bib:
tags: #term #investing

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.

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.

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.