1 (800) 998-9075 | (Toll free) +1 (407) 379-4907

Bollinger Bands Technical Analysis Indicator Explained

23 Mar

Bollinger Bands Technical Analysis Indicator Explained

bollinger bands

To simplify the calculations, let’s take a period of 10 bars. This move created our initial buy signal as prices began to trade outside of the 95% containment region. Additionally, the price broke above the midline to further justify the buy signal. The idea is to use daily charts, and when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase.

The market’s low volatility is like the calm before bad weather. The emergence of a sharp expansion of and a strong price movement in such a situation indicates the possible formation of a new strong trend. A value greater than 1 is possible if the price goes above the upper Bollinger bands. In this case, it will be a signal either about an overbought asset, or about a change from a bearish to a bullish trend.

Choosing Bollinger Band Methods for Different Market Conditions

Next, calculate the standard deviation over the same number of periods as the simple moving average. For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average. Bollinger bands help determine whether prices are high or low on a relative basis. They are used in pairs, both upper and lower bands and in conjunction with a moving average.

The first step in calculating bollinger bands® is to compute the simple moving average (SMA) of the security, typically using a 20-day SMA. A 20-day SMA averages the closing prices for the first 20 days as the first data point. It is difficult to gauge the usefulness of Bollinger Band indicators. Despite its relatively young age, this tool has become classic in technical analysis.

Example of Bollinger Bands®

Bollinger himself stated a touch of the upper band or lower band does not constitute a buy or sell signal. Another simple yet effective trading method is fading stocks when they begin printing outside of the bands. Now, let’s take that one step further and apply a little candlestick analysis to this strategy. There are times, however, when the strategy is correct, but the selling pressure continues. During these conditions, there is no way of knowing when the selling pressure will end.

bollinger bands

Fundamental analysis examines market news, economic/social/political forces, and earnings data to predict how an asset’s price will move. Technical analysis, on the other hand, uses charts and various technical indicators to forecast market conditions. The selling pressure continued to take the stock down where it hit an intraday low of $76.77 (more than 6% below the entry) after only two days from when the position was entered.


Leave a Reply: