Bollinger Band is a technical analysis tool created by John Bollinger in the 1980s. It consists of two bands that are placed around a moving average, one above and one below. The upper band measures the high end of price movement while the lower band measures the low end of price movement.
The purpose of this indicator is to measure volatility by showing when prices have moved beyond what would be expected based on normal market conditions. When prices move outside these bands, it can signal either an overbought or oversold situation and may indicate an opportunity for traders to enter or exit positions accordingly.
For example, if prices move above the upper band, it could indicate that they are becoming overextended and may soon reverse course back down towards the middle line (the moving average). Conversely, if prices drop below their lower level then they could be signaling a buying opportunity as they become undervalued and poised for a bounce higher.
Bollinger Bands can also be used in combination with other indicators such as volume or momentum oscillators to further refine trading signals generated from them alone; this type of strategy is referred to as “mean reversion” trading since its goal is usually to catch reversals at extreme levels before they happen.
Traders should always remember that Bollinger Bands are not meant to give specific buy/sell signals but rather provide insight into potential areas where those signals might arise. Additionally, using too many parameters can often lead to false positives which could negate any possible gains made from following their advice – so use caution when adding new parameters!
