Bollinger Bands

By mosesbet · Filed Under Spread Betting Comments Off on Bollinger Bands 

Bollinger Bands are technical indicators that can be used to test the volatility of financial markets.  Bollinger Bands were invented in the 1980s by John Bollinger where the need for adaptive, dynamic trading bands became necessary.

Bollinger Bands are a set of 3 curves or lines on a graph.  The middle band serves as the base for the upper and lower bands and is more or less just a moving averages trend line. The upper and lower bands are normally calculated as 1 standard deviation away from the middle band (this can be adjusted to suit your purpose).

The interval between the upper and lower Bollinger Bands showed the volatility of the market.  The bigger the interval, the more volatile the market is.  The tighter the interval, the more consolidated the market is.

What Can Bollinger Bands be used for?

Bollinger Bands can be used on technical charts for a variety of things.  Their main function is to show the volatility of a given market however they can also be used to identify pattern recognition and comparing price actions for trading decisions.

If you’re trying to find the support and resistance levels then Bollinger Bands can help a lot for this. The upper and lower Bollinger Bands usually determine the dynamic support and resistance levels.  If you have a look at any technical charts with Bollinger Bands then you’ll see that the swing high and swing lows almost line up exactly with the upper and lower Bollinger Bands respectively.

The other good thing about Bollinger Bands is that they can be used to identify patterns and characteristics in the market.  The Bollinger Bounce describes the natural movement of the market back towards the middle Bollinger Bands after hitting the lower or high bands.  You can use this information to predict the future movement of stock, possibly placing a stop-loss order just below the lower Bollinger Band (when bouncing back upwards) when going long.

The Bollinger Squeeze describes the process where the Bollinger Bands tighten.  When this happens it is a very good indication that the market is about to break out.  If the one of the candle sticks breaks beyond the lower or upper bands than it usually signals a break out at that level.

You can use this knowledge to go long during a Bollinger Squeeze, buying at the higher Bollinger Band when the candle stick breaks beyond it.  You could place a stop-loss either just below the higher Bollinger Band (new support level) or even at the lower Bollinger Band if you’re going long.

For more information on Bollinger Bands (including expert articles, guides and DVDs) then you should visit BollingerBands.com.

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