Bollinger Band

Bollinger Band

In technical analysis, a chart or table that compares a security's volatility to its price over time. Bollinger bands consist of a simple moving average of the security's price over a given number of days (usually 20 or 21), plus one upper limit and one lower limit. The limits are calculated as the amount of the moving average plus or minus two standard deviations. The purpose of Bollinger bands is to provide a working definition of a security's upper and lower price limit, to indicate if volatility is increasing, decreasing, or staying the same. Bollinger bands are one of the most popular technical analysis tools.

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Bollinger Band

What Does Bollinger Band Mean?

A band that is plotted two standard deviations away from a simple moving average. In the example below, the price of the stock is banded by an upper band and a lower band along with a 21-day simple moving average.

Investopedia explains Bollinger Band

Because standard deviation is a measure of volatility, Bollinger bands adjust to changing market conditions. When markets become more volatile, the bands widen (move farther away from the average), and during less volatile periods, the bands contract (move closer to the average). A tightening of the bands often is used by technical traders as an early indication that volatility is about to increase sharply. This is one of the most popular technical analysis techniques. The closer prices move to the upper band, the more overbought the market is thought to be; the closer they move to the lower band, the more the market is considered oversold.

Related Terms:
• Moving Average
• Standard Deviation
• Technical Analysis
• Trend Analysis
• Volatility