Bollinger Bands are a commonly used technical analysis tool that helps traders understand volatility in the market. They consist of three lines: a middle band, an upper band, and a lower band. The middle band is typically a simple moving average, while the upper and lower bands are a specified number of standard deviations away from the middle band.
The upper and lower bands act as dynamic support and resistance levels, indicating potential overbought or oversold conditions. When the price moves towards the upper band, it is considered overbought, and a reversal or correction may be imminent. Conversely, when the price moves towards the lower band, it is considered oversold, and a potential buying opportunity may exist.
Traders often use Bollinger Bands in conjunction with other technical indicators to make more informed trading decisions. By understanding the volatility patterns indicated by the bands, traders can better time their entries and exits in the market.
