Bollinger Bands are specifically designed to adjust to changes in a security's trading range, making them particularly useful for extreme volatility analysis. Invented by trader John Bollinger to provide relative definitions of high and low, Bollinger Bands are comprised of three separate lines plotted on a price chart. The relationships between these three bands can be used to understand trader sentiment and locate potentially overbought or oversold positions.
The center Bollinger Band is calculated using a simple moving average that normally consists of 20 periods. The two outer bands are each set two standard deviations away from the center band, one above and one below. Because they are calculated used standard deviations, the upper and lower bands fluctuate as the volatility of the underlying trading instrument fluctuates. The Bollinger Bands for a highly volatile security tend to be relatively wide. Bands for a low volatility security tend to be relatively narrow.
However, the real benefit of Bollinger Bands is that they adjust to a security when its trading range changes over time. Consider a historically volatile security the Bollinger Bands for which have narrowed over time, moving closer to the moving average.
This shrinking trading range is often interpreted by traders to mean that market participants are uncertain, but that the market will eventually revert back to a historically average volatility. Traders can combine the Bollinger Bands with other technical indicators to guess at the timing and direction of a pending breakout.
Bollinger Bands are flexible, making them applicable to a number of different stocks, indexes, exchanges, commodities or other trading instruments. Dictionary Term Of The Day.
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Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. By Sean Ross Share. Learn more about Bollinger Bands, a tool based on standard deviations of moving average that can be applied to both high Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility Learn about John Bollinger and his widely followed indicator, Bollinger Bands.
Explore how traders interpret the different Discover the logic behind using Bollinger Bands as a measure of price volatility for a security, and how the bands adapt Read about the differences between how Bollinger Bands and moving average envelopes are constructed and what that means for Understand how standard deviations and Bollinger Bands are used to measure market volatility and how this is helpful in establishing Bollinger Bands have become an enormously popular market tool since the s but most traders fail to tap its true potential.
In the s, John Bollinger developed the technique of using a moving average with two trading bands above and below it. Learn how this indicator works, and how you can apply it to your trading. This strategy has become one of the most useful tools for spotlighting extreme short-term price moves. Bollinger Band box patterns set up profitable opportunities when trends give way to well organized trading ranges.
Pick tops and bottoms while still trading within the overall framework of a trend. The shale band refers to a price level at which most North American A volatility based 'envelope' indicator that measures the movement A conflict of interest inherent in any relationship where one party is expected to act in another's best interests.
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