How do Bollinger Bands account for market volatility?

Bollinger Bands are a technical analysis tool used to measure market volatility based on standard deviations. The bands consist of a middle line, which is typically a moving average, and two outer bands that are calculated based on the standard deviation of price movements from that moving average.

When market prices show greater volatility, the standard deviation increases, causing the outer bands to expand outward. Conversely, when the market experiences less volatility and price movements are more stable, the standard deviation decreases, leading the outer bands to contract. This dynamic adjustment allows Bollinger Bands to provide an ongoing indication of market volatility, reflecting current market conditions and helping traders make decisions based on that volatility.

In this context, the choice indicates that the band structure adjusts to the fluctuating nature of the market, thus providing critical signals for price movement. Other options do not reflect the true nature of how Bollinger Bands are designed to function in relation to market volatility.