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Bollinger Bands
Developed
by John Bollinger, Bollinger Bands are an indicator that allows users
to compare volatility and relative price levels over a period time. The
indicator consists of three bands.
The middle line is the simple
moving average, normally set as a period of 20 (number of bar/ticks in
a given time period), and is used as a base to create upper/lower
bands. The upper band is the middle band added to the given deviation
multiplied by a given period moving average. The lower band is the
middle band subtracted by the given deviation multiplied by a given
period moving averages.
It used for determining whether current
values of a data field are behaving normally or breaking out in a new
direction also for identifying when trend reversals may occur.
Using Bollinger Bands
1) Trend – When price moves outside of the bands, it is believed that the current trend will continue.
2)
Volatility- The band will expand/contract as the price movement becomes
more volatile/or becomes bound into tight trading patterns,
respectively.
3) Determine Oversold/Overbought Conditions – When
price continues to hit upper band, the price is deemed overbought (may
suggest sell). When price continues to hit lower band, the price is
deemed oversold (may suggest buy).
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