One of the well-known technical analysis techniques, Bollinger Bands, draws three lines: one above and one below the asset price line. To create an “envelope,” its specific period moving average is designated as the midline. These lines display the band or volatility range in which the price of given security fluctuates.
Given that standard deviation is a measure of volatility, volatility is depicted for given security using its standard deviation, which is indicated by an upper and lower line or band. Midway through the 1980s, John Bollinger created Bollinger Bands, which he later trademarked in 2011. Originally known as “trading bands,” John Bollinger later developed this idea and coined the term “Bollinger Bands.”
Traders use Bollinger bands to delay action until the market approaches the upper or lower bands. Price movement that comes from the bands increases the likelihood that the market is either overbought (upper band) or oversold (lower band) (lower band). So, when the price touches the higher band, the mean reversion trader will execute a short, and when the price touches the lower band, along.
