Knowledge base

What are Bollinger Bands?

History is full of cases where, creating something for their own convenience and advantage, talented people invented a real treasure for the whole world. This happened with American financial analyst John Bollinger, who in 1984 decided to develop his own system for calculating investments in financial markets. After seven long years, the trader introduced his indicator to the investment community, which was highly valued by its participants. Soon, this innovative system was enthusiastically adopted by traders around the world and was named Bollinger Bands. Although Bollinger’s brainchild was created 30 years ago, it does not lose its relevance for traders of the 21st century. We will tell you right now about the secret and uniqueness of this tool.

Definition of Bollinger Bands

Bollinger Bands are a technical indicator used to measure market volatility. With Bollinger Bands, a trader can assess whether the current price is high/low compared to the moving average over the recent period, and predict the possibility of a fall or rise to its level. The key task of this tool is to help the investor make a decision on buying or selling an asset.

How to use the tool?

Bollinger Bands consist of three main lines:

  • The central line corresponds to the simple moving average of the price.
  • The upper and lower lines are the levels at which the price is considered sufficiently high/low in relation to the central band over the recent period.

    It is important to understand that Bollinger Bands is a variable indicator as its width changes depending on the conditions. The indicator swings help traders to determine the market conditions: whether they are overbought or oversold.

    • Overbought

      When the price reaches the upper line, the asset is trading at a relatively high price and is considered overbought. This is a signal that it can be sold, anticipating a further decline in price towards the central band.

    • Oversold

A fall in price to the lower line indicates that the asset is trading at a comparatively low price and is considered oversold. This means that it is time to buy it, expecting a further rise in price towards the central band.

Main Characteristics of Bollinger Bands

  • The indicator helps determine the degree of market volatility based on the distance between the upper and lower bands. If market volatility increases – the indicator expands, and vice versa. Most often, this happens against the backdrop of the release of important global news.
  • Bollinger Bands demonstrate what is happening in the market right now, forming a channel in which the price moves.
  • However, this technical tool is not a constant reflection of price movement assessment and cannot accurately indicate how the traded asset will behave in the future. Despite this, the indicator periodically provides signals that allow trading with high profit prospects.
  • It is important to remember that it is undesirable to use the bands as a standalone tool. However, many traders use this indicator as the sole and main lever of their trading strategy. When it comes to harmonious interaction of Bollinger Bands with other tools, it combines quite well with RSI, MACD, and other.
  • Bollinger Bands can be used on most timeframes familiar to traders including minute, hourly, daily, and other.