Developed by John A. Bollinger, Bollinger Bands is very important technical indicator used to gauge volatility of any stock. In technical analysis bollinger bands has a special role to play, it informs traders and investor about the overbought and oversold levels.
If the price is near the upper Bollinger Band, it’s considered “overpriced” whereas if the is price near the lower Bollinger Band, it’s considered “discounted”. As a trader one may sell when the price reaches the top of the band on the other hand, if the prices reached to the lower band one can look for buying.
Having said that, do not consider only above mentioned things while executing your trades. One should have a deeper understanding of the bollinger bands (BB) before using it, otherwise you might use it wrongly and bear losses. Bollinger Bands can be used on most financial instruments like equities, indices, commodities, futures, options, currencies, bonds etc.
BB are lines plotted in and around the price structure on chart of any security. It primarily consist of a simple moving average (also known as the middle band), an upper band, and a lower band. This bands helps in identifying, whether prices are high or low on a relative basis.
This curves when gets plotted on a chart helps in taking buy or sell signals. Whenever the price touches the upper band a sell can be triggered. Conversely, when price touches the lower band a fresh buying position can be started.