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Technical Indicators • Types of Graphs • Pivot Points • Fibonacci Retracements • Moving Averages - MACD • Relative Strength Index • Stochastic Oscillator • Bollinger Bands • Commodity Channel Index • Parabolic Stop-Reverse • DMI and ADX • Average True Range |
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Bollinger bands
Bollinger bands keep the evolution of prices within an envelope which simultaneously acts as support, resistance as well as trend and volatility indicators.
The standard deviation in Bollinger bands is calculated according to the market's volatility. The more volatile prices are, the further apart the bands are.
According to John Bollinger, this system shouldn't be used by itself. It should be combined with other technical indicators.
Default parameters
- A basic 20-day moving average
- Upper band = 20-day moving average + 2 standard deviations of average prices over 20 days
- Lower band = 20-day moving average - 2 standard deviations of average prices over 20 days
Using the Bollinger bands
- Identifying a change in the trend
Price changes tend to occur after a tightening of the bands.
- Measuring the strength of a trend
The greater the spread between the lower and upper bands, the stronger the trend. Prices that go beyond the bands are a strong signal that the trend will continue.
- Playing on bounces between bands
The bands can be used as support and resistance levels. After having touched a band, prices have a tendency to want to touch the opposite band. This technique can be very useful in a market with no clear tendency or when the bands are parallel.
