| Technical Information - Background | | | | long as prices stay in this channel, traders can be |
| Bollinger Bands were developed by John Bollinger as a | | | | reasonably confident that prices are moving as |
| technical trading tool in the early 1980s. Theyarose | | | | expected. |
| from the need for adaptive trading bands and the | | | | Benefits of Bollinger Bands |
| observation that volatility was not static as was | | | | - Use them to trade trends |
| widely believed, but dynamic. Bollinger developed the | | | | - Identify early reversal signals |
| technique of using moving averages with two trading | | | | - Exhibit how strong (tradeable a stock's move is |
| bands. This is not unlike using an envelope on either | | | | - Reveal a great way to trade break outs |
| side of a moving average. However, unlike using a | | | | General Uses/Indications from the Bands |
| percentage computation from a normal moving | | | | - When the stock price touches the upper Bollinger |
| average, Bollinger Bands add and subtract a standard | | | | Band continually, the price is thought to be |
| deviation calculation. | | | | overbought. |
| Bollinger Bands are used to provide a definition of | | | | - when stock prices continually touch the lower band |
| relative high and low. This is an indication of prices | | | | of the Bollinger Band, the prices are considered |
| being "high" at one end and "low" at the other end. | | | | "oversold," and thusly a buy signal would kick in. |
| Using this definition can aid in recognizing rigorous | | | | - Designate the upper and lower bands as price |
| patterns and is useful in the comparison of price | | | | targets when using Bollinger Bands. If the price |
| action to indicator action when arriving at systematic | | | | deflects off of the lower band and crosses above |
| trading decisions. | | | | the middle line (the 20-day average), then the upper |
| Components | | | | band comes to represent the upper price target. |
| Bollinger Bands consist of a centerline and two price | | | | Prices usually fluctuate between the upper band and |
| channels. One price channel is above the centerline, | | | | the 20-day moving average in a strong uptrend. |
| and the other is below the centerline. This centerline | | | | When this happens, a crossing below the middle line |
| is an exponential moving average. The price channels | | | | warns of a reversal in trends to the downside (lower |
| are standard deviations of the stock being studied by | | | | band). |
| the chartist. Therefore, the definition of a "price | | | | - Trending stocks will Walk the Bands Stocks |
| channel" in this regard refers to the encompassment | | | | touching the upperband are in and uptrend. Stock |
| of the trading activity around the trend of trading | | | | touching the lowerband are in a downtrend. |
| after a sharp rise or fall in the market. The bands will | | | | Channeling stocks will not touch the bands. |
| expand and contract as the price action of an issue | | | | General Trading Rules |
| becomes volatile (this is expansion) or becomes | | | | Use of the Bollinger Band among traders varies wildly. |
| bound into a tight trading pattern (the definition of | | | | Some traders buy when the price touches the lower |
| contraction). | | | | Bollinger Band and sell when price touches the moving |
| The middle Bollinger Band equals a 20-period moving | | | | average in the center of the bands. Conversely, |
| average. The upper Bollinger Bands consists of the | | | | other traders buy when price breaks above the |
| middle Bollinger Band plus the total of two 20-period | | | | upper Bollinger Band or sell when price falls beneath |
| standard deviations. The lower Bollinger Band is | | | | the lower Bollinger Band. |
| equivalent to the middle Bollinger Band minus the total | | | | Bollinger Bands can also be used in combination with |
| of two 20-period standard deviations. | | | | price action and other indicators to generate signals |
| What Bollinger Bands Measure | | | | and foreshadow significant moves. A "double bottom |
| Two important tools are derivative of the Bollinger | | | | buy" signal is given when prices penetrate the lower |
| Bands. BandWidth, which is a relative measure of the | | | | band and remain above the lower band after a |
| width of the bands, is the first tool. BandWidth is | | | | subsequent low forms. It doesn't matter which low is |
| calculated by dividing the result of the upper Bollinger | | | | higher or lower than the other one, as long as the |
| Brand minus the lower Bollinger Band by the middle | | | | second low stays above the lower band. On the |
| Bollinger Band. This is most often used to quantify | | | | other hand, a "double top sell" signal is given when |
| "The Squeeze, " volatility based trading opportunity. | | | | the prices peak above the upper band and the next |
| The second tool derived from Bollinger Bands is %b. | | | | peak fails to break above the upper band. |
| this is a measure of where the last price is in relation | | | | Not only stock traders use the Bollinger Band. Options |
| to the bands. This is calculated by dividing the result | | | | traders (especially implied volatility traders) often sell |
| of the last minus the lower Bollinger Band by the | | | | options when Bollinger Bands are at their most |
| upper Bollinger Band minus the lower Bollinger Band. | | | | historic difference or buy when Bollinger Bands are at |
| %b is most often used to clarify trading patterns. It | | | | their closest historic point. They do this with the |
| is also used as an input for trading systems. | | | | expectation that volatility will revert back toward the |
| Markets trade erratically on a daily basis even though | | | | average historical volatility level for the stock. |
| they are still trading either when they are up in the | | | | In conclusion, Bollinger Bands are helpful when |
| trend or down in the trend. Moving averages are | | | | generating buy and sell signals. They are not, |
| used with support and resistance lines to anticipate | | | | however, designed to determine the future direction |
| the stock's price action. These upper resistance and | | | | of a security. The Bands were designed to add to |
| lower support lines are first drawn and then | | | | other analysis techniques and indicators. All in all, |
| extrapolated to form channels. The trader expects | | | | Bollinger Bands serve two primary functions: the |
| prices to be contained within these formulated | | | | identification of low and high volatility periods, and the |
| channels. Sometimes, straight lines are drawn | | | | detection of periods when prices are at an extreme |
| connecting either tops or bottoms of prices in order | | | | and possibly unsustainable level. |
| to identify the upper or lower price extremes | | | | To see how I implement Bollinger Bands into my |
| (respectively). Parallel lines are then added to define | | | | trade plans, check out my videos on Youtube @ |
| the channel within which the prices should move. As | | | | youtube. |