Bollinger Bands Strategies

Bollinger Bands is a technological analysis tool invented by John Bollinger in the 1980s. After evolving from the concept of trading bands, Bollinger Bands can be used to measure the height or fall of the price in relation to operations previous.

Bollinger Bands consist of:

a middle band is a simple moving average (MA) of period N

an upper band in K times a standard deviation of N-period above the middle band (MA + Kσ)

a lower band in K times a standard deviation of N-period below the middle band (MA - Kσ)

Typical values for N and K are 20 and 2, respectively. The default option for the average is a simple moving average, but other types of averages can be used as needed. The exponential moving average is a second common option. ] Generally, the same period is used both for the middle band and for the calculation of the standard deviation.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high in the upper band and low in the lower band. This definition can help in the rigorous recognition of patterns and is useful for comparing the price action with the action of the indicators to reach systematic business decisions.

The use of Bollinger Bands varies widely among merchants. Some merchants buy when the price touches the lower Bollinger Band and leave when the price touches the moving average in the center of the bands. Other merchants buy when the price exceeds the upper Bollinger Band or sell when the price falls below the lower Bollinger Band. In addition, the use of Bollinger Bands is not limited to stock traders; Option traders, especially implied volatility traders, often sell options when Bollinger Bands are historically distant or buy options when Bollinger Bands are historically together, in both cases, waiting for volatility to return to the average level of historical volatility of the stock.

When the bands are together, a period of low volatility in the price of the shares is indicated. When they are far apart, a period of high price volatility is indicated. When the bands have only a slight slope and are approximately parallel for a long time, it will be found that the price of an action oscillates between the bands as if it were in a channel.

Merchants often tend to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator such as Bollinger Bands will often be combined with a non-oscillating indicator such as a chart pattern or a trend line; If these indicators confirm the recommendation of the Bollinger Bands, the trader will have more evidence that the forecast of the bands is correct