Bollinger Band Analysis
Bollinger Band analysis is a technical indicator consisting of a moving average and two outer bands representing standard deviations from that average. The bands expand when volatility increases and contract when it decreases.
In the context of mean reversion, traders use these bands to identify overbought or oversold conditions. When the price touches the upper band, it may be considered overbought, suggesting a potential downward correction.
When it touches the lower band, it may be considered oversold, suggesting a potential upward correction. In crypto, these bands are highly effective at visualizing the extreme volatility that is common in the asset class.
They are often used in conjunction with other indicators to confirm trade signals. However, they should not be used in isolation, as strong trends can cause the price to "ride the bands" for extended periods, invalidating simple mean reversion signals.