How to profit from Bollinger Bands
Developed in the 1980s
by John Bollinger, this oscillator is a technical indicator that
incorporates the idea that volatility is dynamic, so the bands adapt as
volatility increases and decreases. The tool uses a moving average with
volatility bands placed above and below it. This provides the trader
with a relative definition of high and low.
What Are Bollinger Bands?
Bollinger
Bands can be used to identify W-Bottoms and M-Tops and help determine
the strength of a trend. They can also help traders easily recognize
highs and lows and can be used to find overbought and oversold areas.
Since they are dynamic, they can be used on different securities with
the standard settings.
Bollinger Bands are made up of a set of
three bands that are plotted in relation to the security’s price action.
The middle band is typically a simple moving average set at 20 periods.
The outer bands are normally set two standard deviations
above and below the middle band. If the price action becomes more
volatile, the bands will widen. If volatility decreases, the bands will
contract and move closer to the average.
W-Bottoms And M-Tops
Arthur
Merrill, author of Behaviors of Prices on Wall Street, identified 16
classic chart patterns with a basic W shape and 16 classic chart
patterns with a basic M shape. Bollinger Bands can be used to help spot
these patterns. If the Bollinger Bands confirm a W-Bottom or M-Top, it
could signify a potential breakout and possible trend reversal.
Overbought And Oversold
According
to Bollinger, the bands should contain a majority of the price action,
which means that a move outside of the bands should be considered
significant. Generally, as the prices move closer to or break through
the upper band, the market could be considered overbought and as the
prices move down to or break through the lower band, the market could be
considered oversold.
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More by John Bollinger
- Bollinger Bands - How to Use Them to Make Massive Profits
- The Power of Bollinger Bands
- How to post technical analysis on mql5 forum
- The Right Way to Trade Bollinger Bands (As the inventor of Bollinger bands, analyst John Bollinger discusses some of the misconceptions about trading the bands and how using them on multiple time frames can be advantageous).
- Reversals with Bollinger Bands
- How to trade Extreme Bollinger Band Reversal in Forex
- How to Trade Bollinger Bands - Stocks, Futures, Forex
- How to trade Bollinger Bands in Forex
- Bollinger Bands and Forex
- Bollinger bands - How To Master Bollinger Bands