Bollinger Bands Explained
Developed by the infamous technical trader John Bollinger a bold germ band is a technical analysis tool defined by a set of lines plot two standard deviations positively and negatively away from a simple moving average that may sound like a mouthful but once we break it down it will become much more clear we start with the roots and to really help you along and understanding we’re going to start with a simple example on your screen is a daily chart for Walmart there are three simple important items to look at when
Observing Bollinger Bands the first being the middle dashed line this line represents the 20-day simple moving average basically this is flying the average price of Walmart over the past 20 trading sessions above and below that line in the blue is what is called the upper band and lower band which represents the two standard deviation move plus and minus from a 20-day simple moving average standard deviation is a mathematical measurement of average variance and features prominently in statistics.
Standard deviation measures how spread out numbers are from an average value quickly imagine two NFL teams which over a ten-year span have an average season win total of 50 percent however imagine team one went 16 and L five times yet finishes one 16 another five times this team could be said to have high variance in its long term performance while team two finished eight eight four ten years straight could be said to have low variance both have won averages of 50 percent however how much they differed from the average could be measured as variance this important measurement is part of what is captured in the
Bollinger Band the top and bottom
Represent a range of values in which 90% of stock movements happen meaning that any time you see stock prices rise out or drop below the band something major has happened many traders believe that closer to prices are to the upper band the more overbought the market and the closer to prices are to lower band but overall traders like to use this technical two ways number one being to squeeze the squeeze is the central concept of Bollinger Bands when the bands come close together constricting the moving average it’s called a squeeze a squeezed signals a period of low volatility and is considered by traders to be a potential sign of future
Increased volatility and possible
Trading opportunities conversely the wire apart two bands move the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade however these conditions are not trading singles the bands give no indication when the change may take place or which direction price could move like I mentioned earlier approximately 90 percent of price action occurs between the two bands any breakout above or below the Bands is a major event the breakout is not a trading signal to the direction and extent of future price movements the bottom line is that
Bollinger Bands are designed to discover opportunities that give investors a higher probability of success John Bollinger himself does not exclusively use this indicator for training instead using a mix of indicators including RSI and various other signals to support his trade ideas thank you guys.