Five Things You Need to Know About Bollinger Bands®

Sep 7, 2012 -

What are Bollinger Bands?

1) Bollinger Band is a technical analysis indicator used to determine (in theory) when a stock is to be thought as overbought or oversold.

2) Bollinger Bands consist of:
a) a period (20 day)* moving average 
b) an upper band at (2)* times a (20 day)* standard deviation above the moving average 
c) a lower band at (2)* times a (20 day)* standard deviation below the moving average 

*Typical value of the moving day average is 20 and the upper/lower bands are calculated using 2 times the moving day average standard deviation

3) In the below chart you can see that the middle dotted line is the 20 day moving average. Twice the 20 day standard deviation is the space between the 20 day moving average and the upper and lower bounds. From this example, you can see that when the stock has been on the lower bounds of this range, we've seen it bounce back up. This suggests that they could be good buying signals.

4) If price action becomes volatile the band will expand. Alternatively, if the band contracts then the price action will be more stable. 

5) When stock price touches the upper Bollinger Band, it is thought to be overbought and could trigger a sell signal. The alternative is also true where if the stock price touches the bottom of the band it is thought to be oversold. In this case, this could trigger a buy signal. 
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