What are Bollinger Bands?


Quick Answer

Bollinger Bands refer to plotting two price channels above and below a center line, also known as the exponential moving average, states Investopedia. The price channels, which are the bands, denote the standard deviation in stock markets.

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Full Answer

A volatile trading market makes the band expand and move away from the moving average, while a tight trading market implies that the bands contract, moving closer to the average, notes Investopedia. Investors study the moving average to understand the price action of the stock, which usually forms a trend after trading over a certain period.

Investors use the Bollinger Bands to determine short-term anticipations in a security, according to Investopedia. The traders buy when stock prices fall below the lower band, and sell at a profit when the prices start contracting toward the average.

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