Bollinger Bands were developed by John Bollinger in the 1980s and have become one of the most commonly used technical indicator by traders and analysts. They can be used to determine volatility, trend, and strength. Basically, Bollinger Bands can be helpful in identifying price patterns that are difficult to spot.
Elements of Bollinger Bands
Bollinger bands are fairly easy to read and can measure volatility and trend at the same time. This technical indicator consists of three main elements:
-A simple moving average
The default setting is often a simple 20-period moving average. This element can be used for measuring the trend, as well as computing the other components of this indicator.
-The upper band
This element is a standard deviation above the simple moving average utilized in the Bollinger bands. In most charting software, two standard deviations is often the default setting.
-The lower band
This element is a standard deviation below the simple moving average used in the tool. The default setting in most charting software is two standard deviations.
Aside from providing meaningful signals on volatility and price direction, they are frequently used to display contracting market conditions which a lot of traders use to anticipate huge breakout moves.
Bollinger Band Squeeze
The Bollinger Band squeeze occurs when the movements of the prices contract to a narrow range. This causes the bands inwards towards each other.
When this happens, it means that pressure is building within the market and it will result in a sharp price movement sooner rather than later. It is a significant indication that the market may possibly experience volatility ahead.
With this, when traders notice that the Bollinger Bands are squeezing together, they will start to position themselves as a substantial movement in price is straight ahead.