Bollinger Bands

What it measures:

Bollinger Bands consist of a middle simple moving average (usually 20 periods) and two outer volatility bands set at standard deviation distances (usually 2 standard deviations) above and below the middle line.

How to interpret it:

• Volatiliy Squeeze: Narrowing bands indicate low volatility, often preceding explosive directional breakouts.
• Overbought / Oversold: Price touching or exceeding the upper band signals relatively overbought conditions; touching the lower band signals oversold conditions.
• Band Walking: Price continually riding the upper or lower band indicates strong sustained momentum rather than an immediate reversal.

Used for:

• Measuring market volatility regimes and contraction/expansion cycles.
• Identifying breakout conditions and extreme price levels.

Limitations:

• Does not specify breakout direction during volatility squeezes.
• Price can continue 'walking the band' during strong secular trends, leading to premature counter-trend trades.