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    Bollinger Bands

     Bollinger Bands are a technical analysis tool developed by John Bollinger in the 1980s. They consist of three lines plotted on a price chart, representing the volatility and potential price movement of a financial instrument, such as a stock, currency pair, or commodity.

    Here's the breakdown of the components and how Bollinger Bands are calculated:

    Middle Band (Simple Moving Average - SMA): The middle line is usually a 20-period simple moving average (SMA) of the asset's price. It serves as the baseline or centreline for the Bollinger Bands.

    Upper Band: The upper band is calculated by adding a specified number of standard deviations (usually 2) above the 20-period SMA. The formula is: Upper Band = 20-period SMA + (2 x Standard Deviation of Price)

    Lower Band: Similarly, the lower band is derived by subtracting the same number of standard deviations (usually 2) from the 20-period SMA. The formula is: Lower Band = 20-period SMA - (2 x Standard Deviation of Price)

    The standard deviation measures the volatility of the asset's price. Widening of the Bollinger Bands indicates increased volatility, while narrowing bands suggest decreased volatility.

    Example:

    Let's consider a stock with a 20-day Bollinger Bands setup.

    Middle Band: 20-day SMA

    Upper Band: 20-day SMA + (2 x 20-day standard deviation)

    Lower Band: 20-day SMA - (2 x 20-day standard deviation)

    Suppose the stock's 20-day SMA is $100, and the standard deviation is $5.

    Upper Band: $100 + (2 x $5) = $110

    Lower Band: $100 - (2 x $5) = $90

    In this case, the Bollinger Bands for the stock would be $110 (upper band) and $90 (lower band) around the 20-day SMA of $100. These bands provide a visual representation of the potential price range based on volatility.

    Traders often use Bollinger Bands to identify potential overbought or oversold conditions. When the price touches or exceeds the upper band, it might indicate the asset is overbought. Conversely, when the price touches or goes below the lower band, it could suggest an oversold condition. However, these signals should be used in conjunction with other technical indicators or analysis for more reliable trading decisions.

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