How do bollinger bands work?
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.
Learn more about trading with Bollinger bands from IG analyst.