A technical indicator consisting of 3 bands that represent the volatility in the market from the mean.
Overview:
Introduced by John Bollinger, the Bollinger Band is a popular volatility indicator constructed by a middle moving average, upper and lower range that are calculated by adding and subtracting Standard Deviations respectively to the middle moving average line. It is used to
* To provide a possible definition of high and low as well as resistance and support
* To identify periods of high and low volatility through bulges and squeezes
* To identify periods when prices are statistically extreme levels based on distance from the mean (moving average).
Bollinger Band on the USD/CAD Daily chart showing April2010-March2011
Source: VT Trader
Interpretations
*When the band is wide, price volatility is high, and when it is low, the market is relatively quiet. Sharp price changes tend to occur after the bands tighten as volatility lessens (a.k.a. “the Squeeze”).
*When the bands expand from a narrow period, it represents a pick up in volatility and a trend may be developing, and the bands are “bulging”.
*When price action tags or touches but fails to break the band, the market is seen to be ranging.
*If the market breaks through, it is overextended in that direction, but it is also signaling an eventual trend in that direction as well.
*Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend
* A move that originates at one band tends to go all the way to the other band
