ANOTHER MARKET INDICATOR
July 21st 2008 00:00
The Bollinger Band is another popular indicator that newbies like me should learn how to use. It was invented by John Bollinger in the 1980’s as a tool used in Technical Analysis. I am not one who is used to dishing out high sounding sophisticated words, in fact, I always try to present simple explanations to be better understood, but please bear with me on this one.
Wikipedia describes Bollinger Bands as consisting of the following:
• a middle band being an N-period simple moving average
• an upper band at K times an N-period standard deviation above the middle band
• a lower band at K times an N-period standard deviation below the middle band
And this is how it looks:
Still from the Wiki: “The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.”
Now, since the Bollinger Band is a tool in Technical Analysis and every technical analyst has his own interpretation of the market, and therefore, his own idea of how things should be done, let us confine ourselves to its most common use.
Like in the case of the Stochastics (previous post) the Bollinger Band can give you an idea when the stock is in overbought, or when it is in oversold, territory . Some traders would buy the stock when its prices touch the lower band, while other traders would recommend a buy when the prices break out from the upper band.
I am assuming that every trader and every investor has his or her own discipline to follow, so I will not dare suggest how you use the Bollinger Band when it comes to buying and selling stocks. What I would suggest is that you use it to validate other observations that you’ve already made using the market indicators which use you find more comfortable to employ.
I would encourage you however to familiarize yourself with the other signals the Bollinger Band provides. Like: the widening of the bands suggests more volatility, while the constricting of the bands is a signal that a dramatic move is about to occur.
And that move could be either in favor of the Bear or the Bull.
Wikipedia describes Bollinger Bands as consisting of the following:
• a middle band being an N-period simple moving average
• an upper band at K times an N-period standard deviation above the middle band
• a lower band at K times an N-period standard deviation below the middle band
And this is how it looks:
Image source: Wikipedia
Still from the Wiki: “The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.”
Now, since the Bollinger Band is a tool in Technical Analysis and every technical analyst has his own interpretation of the market, and therefore, his own idea of how things should be done, let us confine ourselves to its most common use.
Like in the case of the Stochastics (previous post) the Bollinger Band can give you an idea when the stock is in overbought, or when it is in oversold, territory . Some traders would buy the stock when its prices touch the lower band, while other traders would recommend a buy when the prices break out from the upper band.
I am assuming that every trader and every investor has his or her own discipline to follow, so I will not dare suggest how you use the Bollinger Band when it comes to buying and selling stocks. What I would suggest is that you use it to validate other observations that you’ve already made using the market indicators which use you find more comfortable to employ.
I would encourage you however to familiarize yourself with the other signals the Bollinger Band provides. Like: the widening of the bands suggests more volatility, while the constricting of the bands is a signal that a dramatic move is about to occur.
And that move could be either in favor of the Bear or the Bull.
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Comment by Fobzy
Fobz
You know what a tiny brain I've got.
Comment by Market Newbie
Stock Market Punk