Bollinger Bands was developed by John Bollinger. It allows users to compare volatility and relative price levels over a period of time. Bollinger Bands are envelopes surrounding the price candles on the chart. They are plotted two standard deviations away from simple moving average. Standard Deviation being a measure of volatility the bands adjusts themselves to ongoing market conditions.
They widen during volatile markets and contract during less volatile periods.
Three Primary Uses of Bollinger Bands are
Pattern recognition
Recognize double tops, head and shoulders, double bottoms
Reversal signals
Identify early warning signs of reversals
Trend analysis
Detect trend continuation and conclusion
Concepts of Bollinger Bands
- Tags of bands are not necessarily buy/sell signals
- Closes outside BBs can be continuation signals if confirmed by other indicators
- Contraction (The Squeeze) is followed by Expansion, is followed by Contraction….
- BBs are based on a simple moving average. Default is 20 period MA with 2 standard deviations.
- Default contains 95% of price action
- Works well on most time frames
- Longer term: 50 periods MA, 2.1 std. deviation.
- Shorter term: 10 periods MA, 1.9 std. deviation.
- A Bollinger Band doesn’t give buy/ sell signals. Use Bollinger Bands with other indicators for confirmations
Remember…your first priority is always to conserve your capital!
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