Definition
Bollinger Bands consist of a middle band (20-period SMA) and two outer bands at 2 standard deviations above and below. Bands widen during high volatility and contract during low volatility. Prices touching outer bands may indicate overbought/oversold conditions.
Formula
Upper Band = SMA + (2 × StdDev)
Lower Band = SMA - (2 × StdDev)
Example
If 20-day SMA is $50 and standard deviation is $2, upper band is $54 and lower band is $46. Price touching $54 suggests overbought; touching $46 suggests oversold.
FAQ
What is Bollinger Bands?
Volatility bands placed above and below a moving average.
How do you calculate Bollinger Bands?
A common formula for Bollinger Bands is: Upper Band = SMA + (2 × StdDev) Lower Band = SMA - (2 × StdDev)
Why is Bollinger Bands important?
Bollinger Bands helps investors evaluate technical analysis and make more informed decisions.