Bollinger Bands is a technical analysis tool developed by John Bollinger that is used to measure market volatility and identify potential buy or sell signals. The tool consists of three lines: a simple moving average (SMA) in the middle and an upper and lower band that are two standard deviations above and below the SMA, respectively. The distance between the upper and lower bands is a measure of market volatility, with wider bands indicating higher volatility and narrower bands indicating lower volatility.
Traders often use Bollinger Bands to identify overbought or oversold conditions in the market. When the price of an asset moves to the upper or lower band, it is considered to be at an extreme level and may be due for a reversal. Traders can also use Bollinger Bands to identify potential breakout trades, where the price moves beyond the upper or lower band and continues to trend in that direction. Bollinger Bands are a popular tool among traders and can be used in combination with other technical indicators to develop a comprehensive trading strategy.