Bollinger Bands
A technical indicator consisting of a middle moving average line and two outer bands that expand and contract based on market volatility.
Plain-English Meaning
Bollinger Bands act like a flexible envelope around the price. When the market is calm, the bands squeeze together. When the market is chaotic, the bands balloon outward to contain the large price swings.
Why It Matters
The bands help visualize volatility and potential extremes. If the price touches the upper band, the asset might be overextended. The "squeeze" of the bands often predicts a major breakout in price.
Simple Example
After days of very little movement, the Bollinger Bands on a chart tightly squeeze the price. A trader might watch for a strong close outside the bands to signal a massive new trend.
This educational example uses selected assumptions for reference calculation purposes. Real conditions may vary by broker, exchange, or instrument.
Beginner Mistake
Assuming that touching the upper band is an automatic signal to sell. During strong, aggressive uptrends, the price can "ride" the upper band higher for a very long time.
Note: Bollinger Bands are reference indicators. They do not predict direction by themselves and can give misleading signals in some market conditions.