The Bollinger Band, a technical tool crafted by John Bollinger, stands as a formidable instrument in the arsenal of traders. Calculated primarily based on standard deviation, often utilizing two standard deviations from a 20-day simple moving average (20SMA), this indicator is a versatile guide for navigating the ebbs and flows of the stock market. Acknowledging the cyclical nature of stock movements—oscillating between trend and consolidation phases—the Bollinger Band adjusts its behavior accordingly. It transitions from expansion (indicative of a trend phase) to contraction (reflective of a consolidation phase).
Traders leverage the Bollinger Band to pinpoint opportune entry and exit points, marking the commencement and conclusion of momentum within the market.
Practically, as stocks traverse through consolidation, the upper and lower bands draw closer. The proximity of these bands signals an impending shift toward a new expansion phase—a fresh period of a trend that traders aspire to engage in for profitable outcomes.
Picture below offers a tangible example of how the Bollinger Band signifies the transition from contraction to expansion phases. The proximity of the upper and lower bands serves as a visual cue, foreshadowing the onset of a new trend.
