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Bollinger
Bands
Bollinger Bands - An Essential Tool For Bigger Profits
By By Authors | On February 22, 2007 | In Investing |
If you have read our article on standard deviation of price you
will understand why this concept is essential for all traders
and a great way of applying the theory is the Bollinger band.
If you have read our article on standard deviation of price you
will understand why this concept is essential for all traders
and a great way of applying the theory is the Bollinger band.
Bollinger bands are simple to use and are available free on many
chart services on the web and will give you a greater insight
into market movement and trading for profit. Let's look at them.
Bollinger bands will help you how to do the following.
1. Predict big trends
2. Spot trend changes
3. Time market entry with greater accuracy.
What are Bollinger Bands?
Bollinger bands are volatility bands drawn around a simple moving
average in the center giving you three lines in total. Bollinger
bands are calculated using the standard deviation of a price over
the exact same period as moving averages and plotted as lines
above and below the moving average. Moving averages are used to
identify the underlying trend and are the middle band. Bollinger
bands then combine this moving average with the volatility of
the individual market to create a trading envelope the standard
deviation. The distance between upper and lower Bollinger bands
simply give you the volatility of the market traded. The greater
the distance the upper and lower bands are the more volatile price
of the market traded is.
Bollinger Bands Work In any market, traded the price rises slowly
over the longer term. Prices may become volatile in short periods
of time, but will normally come back to the longer term moving
average which is defined by the centre band. The center band the"normal"
value of the market traded that people are used to paying over
time i.e it reflects the supply and demand fundamentals. The volatility
of the outer bands shows how volatile prices are and how far away
price is from "normal" value. Short term price spikes tend to
be short term and are normally caused as much by trader psychology
Bollinger bands can therefore help with the following.
1. Spotting New Trends
When a market makes trades in a narrow range, the Bollinger bands
are also narrow and close to the central band this shows a market
with low volatility. This can be a warning that a trending move
is about to start. When prices break above or below the upper
or lower band, a signal is given that a trend is about to develop
and a trader will go with the break.
2. Timing Entry Levels
The Bollinger bands can when a trend has started help you get
into the trend with good risk to reward on a price retracement.
Look for pullbacks to the center band and enter in the direction
of the trend.
3. Market Turning points
When the price touches the top of the Bollinger band and pauses
a return to the middle band is on the cards (especially in the
short term) as prices have moved to far to quickly. If the price
touches the bottom of the Bollinger band and momentum does not
follow through the opposite scenario is in place i.e. a buy signal.
Bollinger bands are a great tool not only for warning of a trending
move but they will also help you time trades within the existing
trend and even help you generate short term sells and buys within
the prevailing trends (very useful for swing traders). Standard
deviation of price as a concept of price works and the Bollinger
band helps you put the theory into practice. As with all indicators
it does not work all the time and needs to be combined with other
tools. We favor simple trend lines and the best momentum indicator
of all - the stochastic indicator which will help you filter out
false signals. Check out Bollinger bands and get a deeper insight
into market movement and you will find once you use them you wont
trade without them.
About the Author
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