Bollinger Bands are a technical analysis tool used by traders to identify potential market trends. They consist of trading bands that are plotted above and below a simple moving average, with the band width determined by the standard deviation of closing prices. In quieter markets, the bands will tighten, while in volatile markets, they will widen. These bands can be used to determine overbought and oversold levels, as well as identifying potential reversal areas and projecting targets for market moves. To further enhance their effectiveness, they are often used in conjunction with other indicators such as RSI, MACD histogram, CCI, and Rate of Change. Divergences between Bollinger Bands and these indicators can signal potential entry or exit points. As a practical rule, buying opportunities may arise when prices are in the lower band, while selling opportunities may present themselves when the price activity is in the upper band.
