A Beginner’s Guide to Bollinger Bands
Bollinger Bands use a moving average and upper and lower bands to show how far prices deviate from their recent average. They are mainly used to observe market volatility and potential overbought or oversold conditions, but cannot determine the future direction on their own.
Basic Structure
Bollinger Bands consist of a middle band, an upper band, and a lower band. The middle band typically uses 20-period simple moving average, meaning the average price over the selected period; the upper and lower bands are generally located two standard deviations above and below the middle band, respectively, to show the range of prices’ deviation from their recent average.
How the Bands Change
Standard deviation reflects the degree of price dispersion, so the bands automatically adjust with market volatility. When volatility is high, the upper and lower bands typically widen and move farther from the middle band; when volatility is low, the bands narrow. With commonly used parameters, most price activity generally falls between the two bands.
Interpretation and Limitations
Prices approaching or breaking through the upper or lower band can be used to observe deviations from the average, but touching a band is not in itself a definitive reversal signal. A pronounced narrowing of the bands is called a “Bollinger Band Squeeze,” indicating low current volatility and the possibility of greater volatility afterward, but not its direction. Practical analysis should also consider RSI, trading volume, and other information, and cannot guarantee results.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/bollinger-bands
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