In crypto trading, Bollinger Bands is a technical analysis tool that is used to measure the volatility of an asset’s price trend and identify potential buy and sell signals.
Bollinger Bands consist of three lines: the middle band, which is typically a 20-period moving average; and two outer bands that are placed two standard deviations above and below the middle band. The distance between the bands widens and narrows based on the volatility of the asset’s price trend.
Traders use Bollinger Bands in several ways. One common approach is to buy when the price of the asset touches the lower band and sell when the price touches the upper band. Another approach is to wait for the price of the asset to break through the middle band and then enter a trade in the direction of the breakout.
Bollinger Bands can also be used to identify potential trend reversals. If the price of the asset moves beyond the outer bands, it may indicate that the current trend is coming to an end and a reversal could be imminent.
As with all technical analysis tools, Bollinger Bands are not infallible and can sometimes generate false signals, so traders should exercise appropriate risk management strategies when using them.