# An Introduction to Bollinger Bands

### What Are Bollinger Bands?

Bollinger Bands are a popular tool in technical analysis used to measure market volatility and identify potential price trends. Created by John Bollinger in the 1980s, this tool consists of three bands:

1. Middle Band: A moving average (typically 20 days)
2. Upper Band: Two standard deviations above the middle band
3. Lower Band: Two standard deviations below the middle band

Purpose and History

John Bollinger developed this tool to help traders gauge market volatility and spot potential trend reversals. By plotting a moving average and adding bands based on price fluctuations (standard deviations), traders can see a price range where the asset is likely to move.

In the volatile world of cryptocurrencies, prices can change rapidly. Bollinger Bands provide a visual way to understand this volatility and helps traders identify when an asset might be overbought or oversold, signaling possible trend reversals or breakouts.

### How to Calculate Bollinger Bands

1. Calculate the Middle Band:
• Compute the 20-day simple moving average (SMA) of closing prices.
2. Determine the Standard Deviation:
• Find the differences between each closing price and the SMA.
• Square these differences, average them, and take the square root to get the standard deviation.
3. Calculate the Upper and Lower Bands:
• Multiply the standard deviation by two.
• Add this result to the Middle Band to get the Upper Band.
• Subtract this result from the Middle Band to get the Lower Band.

To summarise the above formula:

• Middle Band = 20-day SMA
• Upper Band = Middle Band + (2 × 20-day Standard Deviation)
• Lower Band = Middle Band – (2 × 20-day Standard Deviation)

### How to Interpret Bollinger Bands

• Price movements: When prices touch or exceed the Upper Band, it might indicate overbought conditions; touching or falling below the Lower Band may signal oversold conditions.
• Trend reversals: Consistent touching of the bands can suggest a trend reversal or breakout.
• Confirmation with other indicators: Combine Bollinger Bands with other tools like RSI or MACD for more accurate signals.