| Bollinger Bands are named after market trader John | | | | move to touch the other band. This, of course, |
| Bollinger, who in the 1970's couldn't find an | | | | depends on where the price is in relation to the age |
| investment analysis that fit his belief's on how | | | | of its trend. During a bull market, for example, the |
| markets related to each other, so he created his | | | | price will touch the upper band, pull back to the |
| own. He believes that market events exist only in | | | | moving average, then touch the upper band again. |
| relation to one another and that there are no | | | | The price may also ride the band higher for awhile |
| absolutes. | | | | before either moving above the band or pulling back |
| Bollinger Bands, like other bands or envelopes, are | | | | inside the band. |
| constructed above and below some central point, in | | | | The price can stay outside the band for a period of |
| this case, an average. Many computer programs allow | | | | time, but generally when that happens price tends to |
| the user to define the width of the bands, thereby | | | | pull back into the band and heads for the moving |
| increasing or decreasing the distance above and | | | | average. If the moving average supports the price, |
| below the moving average. Using trial and error, you | | | | the price may move higher, but if support fails, price |
| may find that different markets require different | | | | will tend to move to the lower band. Once the price |
| values. Generally speaking, the bands are designed to | | | | hits the lower band, price generally moves back to |
| use a 20 day moving average and the bands are | | | | the moving average. This point in the trend is |
| shifted up or down to contain 95% of the data | | | | important in that if the moving average provides |
| points. Some may refer to this as plus or minus 2 | | | | resistance to further price appreciation, the trend |
| standard deviations. | | | | may change and begin a bear market. |
| Using the bands to determine price movement can | | | | It is important to study charts and define your |
| be tricky and require some study of the market you | | | | trading rules before engaging in trading the markets. |
| intent to trade. Generally speaking, the price tends to | | | | Prices and bollinger bands react differently and there |
| touch one band (either the upper or lower), then | | | | is no one pattern definition that fits all the time. |