One of the most used Oscillators when it comes to the area of technical analysis is the Bollinger Bands.
For investors who are starting to learn technical analysis, the Bollinger Bands are considered an Advanced tool.
However the bands are simple to use when making position adjustments.
The Basics The following paragraphs will be dedicated to those who want to learn technical analysis.
They provide an introduction to how this particular Oscillator works.
The Bollinger Bands were one of the first adaptive volatility "envelope" tools.
This means that the Bands provide something of a "normal" range area and that such a range is not static; it will shift and change based on price volatility readings.
Visually, the Bands create a visual of four lines; the upper and lower bands, the security price, and the moving average.
The upper and lower bands are mirror-images of one another, and the moving average is something of a base-line.
Since the upper and lower lines are derivatives of the underlying security's standard deviation, they will widen (balloon) as volatility increases and narrow (shrink) as volatility decreases.
Right in the middle, you will find the moving average.
You will find the stock price somewhere on the same chart.
Its exact position in relationship to the bands determines the long or short signal.
How It Works This next section may be a little complicated for those who have just started to learn technical analysis.
However, it will provide key information in terms of how the Bands behave.
Typically, when the security price touches or penetrates the upper and lower bands, a long or short trading signal is triggered.
These bands are plotted 2 standard deviations above and below the 20-day moving average for regular-term trades, and 1 1/2 standard deviations above and below the 10-day moving average for short-term trades.
What this means is that short-term trades will look at a narrower range and longer-term trades will consider a wider range.
Trading Using the Bollinger Bands When evaluating a security's price using Bollinger Bands investors who learn technical analysis at an advanced level will usually decide that the price is high when it touches the upper band.
Alternately, they will decide the price is low when it touches the lower band.
This, in turn, produces a short and long signal respectively.
Simplified Trading Suggestions A simpler way to look at Bollinger Bands, particularly for those who are just starting to learn technical analysis, is to understand that a security's price will normally trade within the envelope.
That means it will rarely pierce the upper and lower lines and will normally trade within those lines.
In keeping with the balloon analogy from earlier, consider that rising volatility leads to market corrections.
The same is true with Bollinger Bands; as they expand and widen, they will "pop" and constrict.
Therefore, taking a long position when the bands are wide and the security price touches or penetrates the lower band is more likely to produce returns than taking a long position when the bands are narrower.
Confirming the Signal If nothing else, investors who learn technical analysis understand that no single signal can be used in isolation.
The same holds true for Bollinger Bands.
John Bollinger himself and other technical analysis textbooks suggest that the Bands should be used to qualify other indicators or oscillators.
Using the Bands with the RSI, for example, would result in the following signals: - The trend will continue if the price touches or penetrates the upper Band AND the RSI is below 70; alternately, it will continue if the price touches or penetrates the lower band and the RSI is above 30.
- A trend reversal is likely if the price touches or penetrates the upper Band and the RSI is above 70; alternately, it is likely to reverse if it touches or penetrates the lower Band and the RSI is below 30.
Best of the Bollinger Bands For those who want to learn technical analysis, understanding the Bollinger Bands and the factors that determine their plotting pattern is a must.
Understanding volatility, standard deviation and to calculate standard deviation, as well how moving averages work are essential.
However, even the most inexperienced investor can easily make trade decisions based on signals provided by Bollinger Bands.
For investors who are starting to learn technical analysis, the Bollinger Bands are considered an Advanced tool.
However the bands are simple to use when making position adjustments.
The Basics The following paragraphs will be dedicated to those who want to learn technical analysis.
They provide an introduction to how this particular Oscillator works.
The Bollinger Bands were one of the first adaptive volatility "envelope" tools.
This means that the Bands provide something of a "normal" range area and that such a range is not static; it will shift and change based on price volatility readings.
Visually, the Bands create a visual of four lines; the upper and lower bands, the security price, and the moving average.
The upper and lower bands are mirror-images of one another, and the moving average is something of a base-line.
Since the upper and lower lines are derivatives of the underlying security's standard deviation, they will widen (balloon) as volatility increases and narrow (shrink) as volatility decreases.
Right in the middle, you will find the moving average.
You will find the stock price somewhere on the same chart.
Its exact position in relationship to the bands determines the long or short signal.
How It Works This next section may be a little complicated for those who have just started to learn technical analysis.
However, it will provide key information in terms of how the Bands behave.
Typically, when the security price touches or penetrates the upper and lower bands, a long or short trading signal is triggered.
These bands are plotted 2 standard deviations above and below the 20-day moving average for regular-term trades, and 1 1/2 standard deviations above and below the 10-day moving average for short-term trades.
What this means is that short-term trades will look at a narrower range and longer-term trades will consider a wider range.
Trading Using the Bollinger Bands When evaluating a security's price using Bollinger Bands investors who learn technical analysis at an advanced level will usually decide that the price is high when it touches the upper band.
Alternately, they will decide the price is low when it touches the lower band.
This, in turn, produces a short and long signal respectively.
Simplified Trading Suggestions A simpler way to look at Bollinger Bands, particularly for those who are just starting to learn technical analysis, is to understand that a security's price will normally trade within the envelope.
That means it will rarely pierce the upper and lower lines and will normally trade within those lines.
In keeping with the balloon analogy from earlier, consider that rising volatility leads to market corrections.
The same is true with Bollinger Bands; as they expand and widen, they will "pop" and constrict.
Therefore, taking a long position when the bands are wide and the security price touches or penetrates the lower band is more likely to produce returns than taking a long position when the bands are narrower.
Confirming the Signal If nothing else, investors who learn technical analysis understand that no single signal can be used in isolation.
The same holds true for Bollinger Bands.
John Bollinger himself and other technical analysis textbooks suggest that the Bands should be used to qualify other indicators or oscillators.
Using the Bands with the RSI, for example, would result in the following signals: - The trend will continue if the price touches or penetrates the upper Band AND the RSI is below 70; alternately, it will continue if the price touches or penetrates the lower band and the RSI is above 30.
- A trend reversal is likely if the price touches or penetrates the upper Band and the RSI is above 70; alternately, it is likely to reverse if it touches or penetrates the lower Band and the RSI is below 30.
Best of the Bollinger Bands For those who want to learn technical analysis, understanding the Bollinger Bands and the factors that determine their plotting pattern is a must.
Understanding volatility, standard deviation and to calculate standard deviation, as well how moving averages work are essential.
However, even the most inexperienced investor can easily make trade decisions based on signals provided by Bollinger Bands.
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