What is the Bollinger Bands indicator?

Bollinger Bands are a commonly used tool in technical analysis to measure market volatility.

Bollinger Bands are technical analysis tools made up of simple moving averages. This indicator consists of 3 bands, including:

- The Middle Band is a 20-day simple moving average (SMA20); calculated as the average of the closing prices.

- Upper Band is calculated by taking the SMA plus 2 standard deviations

- Lower Band is calculated by subtracting 2 standard deviations from the SMA line

In which, the standard deviation shows the difference in the value of each evaluation time compared to the mean value. Furthermore, it is a quantity to measure the dispersion of a data set.

Longer-term traders can apply a longer cycle and a higher standard deviation, while short-term traders can adjust for a lower cycle and standard deviation.

Normally, with the market in a sideways trend, investors can apply a strategy of selling when the price touches the upper band and buying when the price touches the lower band of the Bollinger Band.

However, when in a strong uptrend or downtrend of the market, this strategy is quite risky.

One of the other popular trading methods when using the Bollinger Bands indicator is the narrowing (Bollinger Squeeze).

A narrowing is a phenomenon that occurs when the upper and lower bands of Bollinger Band move closer to each other and gradually approach the middle band, showing that the stock price is in an accumulation phase with low volatility.

This is a signal that the stock price is about to have strong and fast movements in the future. However, a narrowing bollinger band is not a trading signal because it does not predict future price trends up or down.

Just like other indicators, Bollinger bands are not always 100% accurate. Besides the information Bollinger Band provides, traders should use it together with other analytical tools to better identify market trends and minimize risks.

Bollinger Bands are based on a simple moving average, using historical data points. Therefore, this is a lagging indicator, the bands will always change with price moves, and do not forecast them. This means that traders may not receive trading signals until price movement is in progress.