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Bollinger Bands Indicator
Description:
Trading bands are among the most widely used technical
indicators in existence. Basically they are lines drawn at
fixed intervals (usually a percentage) around a moving
average. Bollinger Bands are bands that vary in distance
from the moving average based on volatility. The upper
band represents x number of standard deviations above the
average, the lower band represents x number of standard
deviations below the average. By using standard deviations
rather than a fixed percentage, the bands adjust for
volatility. During volatile periods the bands move further
away from the average, while during market lulls the bands
move closer to the average.
Conventional Analysis:
The closer prices move to the upper band, the more
overbought the market is; the closer prices move to the
lower band, the more oversold the market is.
Additional Analysis:
In practice, the band offsets (StdDevUp and StdDevDown)
should be adjusted to enclose about 90 percent of market
activity, with about 10 percent slipping either above or
below the Bollinger Bands. This allows for a more accurate
assessment of the true trading range of the underlying
security than always using the default +/- 2 standard
deviations.
In addition, some traders may even want to experiment
using a larger offset for the lower band, to allow for the
tendency of Down Trends to be sharper and of shorter
duration than Up Trends. While the conventional usage
always has the security rated as either overbought or
oversold, a better method is to allow for a neutral
reading when prices fall about half way between the upper
and lower bands.
Applying this method, a security would only be rated as
overbought or oversold if it were actually very close to
or beyond either the upper or lower band. In addition,
significant consideration should be given to the price
momentum. A security which has entered into overbought or
oversold territory may continue to become even more
overbought or oversold before reversing. For this reason,
look for evidence of price weakness/strength before
expecting a reversal.
Additional References:
Bollinger, John; CFA, CMT President, Bollinger Capital
Management, Inc. P.O. Box 3358 Manhattan Beach, CA 90266
(310)798-8855.
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Technical Analysis Studies Available
You can adjust parameters of each indicator
to suit you. |
