Bollinger Bands

What is it?

‍Bollinger Bands are like a rubber band around an asset’s price, showing where it’s likely to bounce or break out. They consist of a middle line (a moving average) and two outer bands that measure volatility.

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‍How is it used?

• Overbought/oversold: Prices touching or exceeding the upper band may be overbought; touching the lower band may be oversold.
• Volatility squeeze: When bands contract (low volatility), a breakout is likely. Wide bands indicate high volatility.
• Mean reversion: Prices often return to the SMA after touching the bands.

How is it calculated?

• Middle band: A Simple Moving Average (SMA), typically over 20 periods.
• Upper band: SMA + (k × standard deviation of price over the same period).
• Lower band: SMA - (k × standard deviation).
  The standard settings are a 20-period SMA and k = 2 (2 standard deviations).

Upper Band = SMA + (2 × StdDev)  

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Lower Band = SMA - (2 × StdDev)

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