Bollinger Band

Bollinger Bands are a tool of technical analysis which was invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. Basically, this tool provides a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. When the market is calm, the Bollinger Band lines get closer together and when the market was changing Bollinger Band line expand. The indicator consists of three bands designed to encompass the majority of a security's price action:

1. A simple moving average in the middle
2. An upper band (SMA plus 2 standard deviations)
3. A lower band (SMA minus 2 standard deviations)

Standard deviation is a statistical unit of measure that provides a good assessment of a price plot's volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of the bands.

In order to use the system effectively, you will need to know a great deal about how it works and understand each component.  You may be able to read and learn from a book yourself.  Others may need to have that class instruction atmosphere to fully understand the way this system works however.  While this system is steady, the way people use it can determine how it works.  There are several ways to deal with the Bollinger Band technical indicator.  You can use these rules to help you get started.

Relativity

The first thing to remember is that the  only provides a relative definition of both high and low.  You can take the definition and compare price action and indicator action, but only at relative levels.  You can use these findings to make decisions about buying and selling.  Keep in mind that volatility and trend are built into this formula, so you won’t need to deal with them otherwise.

Indicators

You can use the bands with momentum, volume, open interest, and market data in order to gather indicators.  When you do this however, remember that you should not directly relate the indicators to each other.  You can use one indicator that deals with volume and another indicator that deals with open interest at the same time.  However, you cannot use two indicators that deal with volume together.  So, be sure that you understand that only one indicator of each type should be used.  If you don’t follow this rule, the Bollinger Bands will not be accurate.

Price

One thing you can use the Bollinger Bands for is to clarify pure price patterns.  You will be able to see tops and bottoms and momentum shifts in prices.  Price is interesting when gathered using the Bollinger Bands because it goes up the upper band and down the lower band.  You can successfully use the bands to get patterns in price and then act in the best interest of your investment. Using this system can help you make smarter and more profitable investing decisions overall.

The Average

When dealing with the average band, you need to note that the default parameters of 20 periods are simply defaults.  They are not always representing what the actual parameters of the market are.  Your average should always be a detailing of the middle-term trend.  It may not always be the best for crossovers however.  Also be sure to lengthen the number of standard deviations if the average is lengthened.  If the average is shortened, you must shorten the number of standard deviations as well.  You must always keep the average logically consistent for the Bollinger Bands to work as they are intended.

Follow the links to learn more about Bollinger Band:

• Bollinger on Bollinger Bands
  
  • Relative Definition of High and Low
  • Chaiken's Innovation
  • Bollinger's Brainstorm
  • Bollinger Bands Features
  • Bollinger Bands Basics
• An Introduction to Bollinger Band
  
  • The Basics of Bollinger Bands
  • Construction
  • Interpretation of Bands
  • Squeezes and Bulges
  • Price Action in a Trending Market
  • Price Targets in Ranging Markets
  • Double Bottom
  • Double Top
  • Conclusion
• How to Trade Using Bollinger Bands
  
  • Three Main Methodologies for Using Bollinger Band
  • 1-2-3 Formations and Bollinger Band
  • The Golden Key to Successful Bollinger Band Trading
  • Trade Using Bollinger Bands
• Trading Strategies
  
  • Gimmee Bar
  • Tales From The Trenches: A Simple Bollinger Band Strategy
  • Inside Day Bollinger Band Turn Trade
  • Two Sets of Bollinger Bands
  • BB Gun
• Bollinger Band Video
• Bollinger Band Indicator (for MT4)

Remember that when you are dealing with the Bollinger Bands technical indicator system that what you see is not a signal to buy or sell.  You must take in all the information the Bollinger bands provide in order to make the best investment decision.  While the Bollinger Bands technical indicator system is a great way to take a look at patterns and gain helpful insight, it is not a system you should use to base your entire investing strategy upon.  Investing is something that often has more to do with life than numbers.  When you are investing, be sure that you allow the numbers and calculations to weigh on your decision.  However, be sure that you also listen to yourself and your gut instinct with investing.  Those who listen to their gut instincts often do very well when it comes to investing.  So, trust yourself and let everything simply come as welcomed assistance.

Learn how the Bollinger Band works and how to add it to your own trading routine, and I hope the explanation of the Bollinger Band can give benefit to your trading analysis.

Good luck and Happy trading.