Showing posts with label bollinger-bands-explained. Show all posts
Showing posts with label bollinger-bands-explained. Show all posts

BOLLINGER BANDS

BOLLINGER BANDS

 BOLLINGER BANDS


Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the   concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades. It consists of a 20 period simple moving average with upper and lower bands. The upper band is 2 standard deviation above the moving average and similarly lower band is 2 standard deviation below the moving average. This makes these bands more dynamic and adaptive to volatility.


Interpretation of Bollinger Bands :


Mr. John Bollinger described following important interpretation of Bollinger bands in projecting price trends.
1.Big move in price is witnessed on either side when bands tightens/contracts as volatility lessens.
2. The upper band act as area of resistance and lower band act as area of support.
3. When prices move outside the band, it signifies breakout, hence continuation of the trend.
4.Bottoms and tops made outside the band, followed by tops and bottoms made inside the band suggests reversal of the trend.


Calculation of Bollinger Bands :

 
 BOLLINGER BANDS

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. 


Indicators derived from Bollinger Bands :

 

The use of Bollinger Bands varies widely among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.  Moreover, the use of Bollinger Bands is not confined to stock traders; options traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.


When the bands lie close together a period of low volatility in stock price is indicated. When they are far apart a period of high volatility in price is indicated. When the bands have only a slight slope and lie approximately parallel
for an extended time the price of a stock will be found to oscillate up and down between the bands as though in a channel.



 BOLLINGER BANDS

Traders are often inclined to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator like Bollinger Bands will often be coupled with a non-oscillator indicator like chart patterns or a trendline; if these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater evidence that what the bands forecast is correct.

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