What is a Bollinger Band?
The meaning of Bollinger Bands refers to a type of technical analysis tool in finance that is used to measure volatility and provide a relative definition of high and low prices. The tool was invented by John Bollinger in the early 1980s and is named after him. The Bollinger Bands consist of three lines that are plotted on a chart: a simple moving average in the middle and two standard deviation lines, one above and one below the moving average. The distance between the bands varies based on the volatility of the underlying asset being analyzed.
The basic idea behind Bollinger Bands is that prices tend to remain within the upper and lower bands during normal market conditions and break out of the bands during periods of increased volatility. If prices are consistently close to the upper band, it may indicate that the asset is overbought and may be due for a price correction. Conversely, if prices are consistently close to the lower band, it may indicate that the asset is oversold and may be due for a price increase.
Traders and investors use Bollinger Bands as a tool to make informed trading decisions by looking at the relationship between price and the bands. For example, they may buy a stock when the price touches the lower band, or sell a stock when the price touches the upper band. It's important to note that Bollinger Bands are not a standalone trading strategy, but rather a tool to be used in conjunction with other technical and fundamental analysis methods.
Simplified Example
The Bollinger Band can be compared to the elastic band that is used to wrap around packages. The band is flexible and can stretch or shrink based on the volatility of the financial asset it represents. When the price of the asset is stable and not fluctuating much, the band will be narrow. But when the price is volatile and moving quickly, the band will stretch and become wider. The Bollinger Band is a tool used in technical analysis to determine whether a financial asset is overbought or oversold, and it provides an indication of future price movements. Just like the elastic band helps to secure the package, the Bollinger Band helps traders to secure their investments by providing a visual representation of market volatility.
Who Invented the Bollinger Bands?
John Bollinger, a highly respected figure in the world of finance and technical analysis, is best known for devising the "Bollinger Bands," a widely used technical indicator in trading. However, the term "boiler band" seems to be a misspelling or a misunderstanding, as the correct term associated with Bollinger is "Bollinger Bands." These bands are a volatility indicator consisting of a set of lines plotted on a price chart. Introduced in the 1980s, Bollinger Bands are utilized by traders and analysts to gauge volatility, identify potential price trends, and determine overbought or oversold conditions in financial markets. John Bollinger's innovative concept of the Bollinger Bands has significantly impacted technical analysis and remains a foundational tool for traders seeking insights into market trends and potential price movements.
Examples
Moving Average Envelope: A Moving Average Envelope is a technical analysis indicator that uses a moving average to create upper and lower bands that are placed a set percentage above and below the moving average line. The width of the bands can be adjusted to be more or less sensitive to price changes.
Keltner Channel: The Keltner Channel is a technical analysis indicator that uses an exponential moving average and the Average True Range (ATR) to create upper and lower bands that are a set distance away from the moving average line. The Keltner Channel is used to help identify potential breakouts and reversals.
Donchian Channel: The Donchian Channel is a technical analysis indicator that uses the highest high and lowest low over a set period of time to create upper and lower bands. The width of the bands can be adjusted based on the user's preferences. The Donchian Channel is used to identify potential breakouts and trend reversals.