Trading Tip #30: Advanced Technical Indicators - Bollinger Bands
Posted in the Day Trading Forum
Since: Jul 11
#1 Jun 10, 2012
Let's take another look at a more advanced technical tool - Bollinger Bands. These were developed by John Bollinger in the 1980s. In simple terms, they use a simple moving average and standard deviations to give a different perspective on potential highs and lows.
Bollinger Bands have a middle band and two outer bands.
The middle band shown on this indicator is a moving average, usually a simple moving average (see Tip #29 for more on those) although some traders do use the exponential moving averages. The standard deviation formulas for the outside bands might be calculated like this example:
* Middle Band = 20-day simple moving average (SMA)
* Upper Band = 20-day SMA +(20-day standard deviation of price x 2)
* Lower Band = 20-day SMA -(20-day standard deviation of price x 2)
The actual values used may depend on user preference. Use and interpretation may also vary.
This technical tool is a way some traders try to define and observe potential patterns. I don't claim to be an expert on these, but there are some common basics that analysts agree on. Volatility is the name of the game for the upper and lower band. Since they are based on standard deviations from the middle band they move closer to the middle when volatility contracts, and further out when volatility expands. Based on this level of volatility, the relationship between those lines and prices can be used to signal potential market conditions. Some analysts might see an overbought market where prices touch the upper band. Conversely, an oversold market might exist when prices are edging towards the lower band.
Past performance is not necessarily indicative of future results.
courtesy of Barchart.com
Other subtle patterns can be seen with Bollinger Bands on a chart.
The way the prices interact with the bands can lead to different kinds of patterns that technical analysts might interpret for trade designs. They have names like W-bottom or M-top or walking the bands. If you like playing with these statistical measures, you might enjoy reading more about them. Generally speaking, the visual cues regarding volatility are the main feature for this kind of chart overlay. They can also be used in conjunction with other analysis or observations as a way of complementing other signals or patterns. Play with Bollinger Bands and see how they might work with your trading tools to confirm or sharpen your market observations.
Best Trades to you,
Founder & President - Trading Advantage
Since: Aug 15
#2 Sunday Aug 16
Forex is an investment with high risk. The velocity of money in the forex daily reach trillions of dollars. Now with even small capital we can invest in forex. Besides the reliable forex broker is also an important factor. As long as I make use of brokers alpari they always provide good support, among others, providing daily trading analysis and online customer support.
Add your comments below
|The best hours to trade||Aug 17||topnewsreview||1|
|Trading Penny Stocks for a Living (Dec '10)||Jul '15||kheeley||22|
|What is your favorite NinjaTrader indicator site? (Oct '09)||Jun '15||joelstockman||36|
|buy products online (Jul '13)||Apr '15||Anonymous||3|
|Binary Options 60 Seconds Trade (Nov '13)||Jan '15||Dave Cozz||4|
|There is a company giving away free shares of s... (Jan '15)||Jan '15||Stephen B||1|
|Ten years later, Buckhead massacre resounds (Aug '09)||Jan '15||Anthea Minnaar||12|
Find what you want!
Search Day Trading Forum Now
Copyright © 2015 Topix LLC