Bollinger Bands

Bollinger Bands are a technical analysis tool consisting of a middle simple moving average and two outer bands placed at standard deviation levels above and below that average. These bands expand and contract based on the volatility of the asset, providing a visual representation of price extremes.

In a mean reversion strategy, traders look for price to touch or exceed the outer bands, signaling that the asset may be overextended and due for a reversal. When the bands are tight, it suggests a period of low volatility, which often precedes a major breakout.

Conversely, wide bands indicate high volatility. Traders must combine this tool with other indicators to avoid false signals, as strong trends can cause the price to "walk the bands" for extended periods without reverting.