Bollinger bands are a popular form of technical price indicator. They were developed by a pioneering technical trader called John Bollinger in the 1980s.
Bollinger bands comprise a market’s moving average, with an upper and lower price channel either side of it. Each price channel (or band) represents the standard deviation away from the moving average of the market.
As a market becomes volatile, its Bollinger bands will expand (referred to as expansion); as it flattens out they will contract (contraction). In this way, they enable traders to see beyond short-term volatility and gain insight into longer price movements.
The use of Bollinger bands can also indicate whether a market is heading into overbought or oversold territory. When a market’s price continually moves outside the upper parameters of a Bollinger band, it can be considered to be overbought, and when it moves below the lower band it could be considered oversold.
While very useful to a lot of traders, Bollinger bands are not infallible and only work with a thorough understanding of how fundamental and technical analysis works with markets.
To learn more, read our technical analysis guide.
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