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Indicator:

Bolinger Bands

Bollinger Bands are a widely used volatility indicator that creates dynamic price channels around a moving average. The bands expand and contract based on market volatility, with the upper and lower bands representing standard deviations from the moving average. This characteristic helps traders identify potential overbought or oversold conditions, providing valuable signals for timing trades. Bollinger Bands' adaptability to various market conditions makes them essential for trend-following and mean-reversion strategies.

Bollinger Bands Indicator


Type of Indicator

Bollinger Bands are a technical analysis tool consisting of three lines: a moving average (usually 20-period), and two standard deviations plotted above and below this moving average. It is a volatility indicator that measures the price variation over a specified period.


Purpose

The primary purposes of the Bollinger Bands indicator are to identify overbought and oversold conditions and to assess market volatility. Bollinger Bands help traders:

  • Determine potential reversal points,

  • Identify periods of low and high volatility,

  • Evaluate the strength and sustainability of price movements.


Calculation Method

The calculation of Bollinger Bands involves several steps:

Moving Average (MA):

  • Typically, a 20-period simple moving average (SMA) is used.

Standard Deviation (SD):

  • Calculate the standard deviation of the closing prices over the same period.


where CC is the closing price.

Upper and Lower Bands:

  • Upper Band: Upper Band = SMA + 2×SD

  • Lower Band: Lower Band = SMA − 2×SD


Trading Based on the Bollinger Bands Indicator

  1. Bounces Off the Bands:

    • When the price approaches the upper band, it may indicate overbought conditions and a potential reversal downward. This is a signal to sell.

    • When the price approaches the lower band, it may indicate oversold conditions and…

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