Bollinger Bands are a technical analysis tool used in forex trading to measure a security’s volatility. The bands consist of three lines: the upper band, the lower band, and a middle band that represents a moving average.
The upper and lower bands are positioned two standard deviations away from the middle band. As the security’s price moves, the bands expand and contract based on the volatility of the security. When the price is trading near the upper band, it is considered overbought, and when it is trading near the lower band, it is considered oversold.
Traders use Bollinger Bands to identify potential buying or selling opportunities, as well as to assess the potential risk associated with a particular trade. For example, if a security is trading near its upper Bollinger Band, a trader might consider selling it because there is a greater likelihood of a price reversal. Conversely, if a security is trading near its lower Bollinger Band, a trader might consider buying it because there is a greater likelihood of a price rebound.