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Bollinger Bands are a technical analysis tool that was invented by John Bollinger in the 1980s. They are used to measure the volatility of a financial asset, like Bitcoin, over a specified period of time. Bollinger Bands comprise three lines: a middle band representing a simple moving average (typically 20-day), and two outer bands that are standard deviations away from the middle band.
Here are the key components of Bollinger Bands:
The middle band is a simple moving average (SMA) of the asset's price over a specific period, usually 20 days.
The upper band is calculated by adding two standard deviations to the middle band, which measures the asset's volatility.
The lower band is calculated by subtracting two standard deviations from the middle band.
Bollinger Bands expand and contract based on the volatility of the asset. When the bands expand, it indicates an increase in volatility, while contraction suggests a decrease in volatility. Traders use Bollinger Bands to identify potential overbought or oversold conditions in the market. For instance, when Bitcoin's price touches or goes beyond the upper band, it could be overbought, and when it touches or dips below the lower band, it could be oversold.
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