7-14 Bollinger Bands
In the 1980s, John Bollinger developed a new technical analysis tool to measure the highs and lows of a security price relative to previous trade data. These “trading bands” help investors track and analyze the “bandwidth” of stock prices over a period.
The object of Bollinger Bands is to identify a “relative” definition of high and low prices over a specific period. Along with identifying trends, these charts will help you measure the volatility of a security. As you examine the bandwidth of a stock, you will notice the variations (standard deviations) on both the plus and minus sides.
Bollinger Bands are a favorite tool of Swing traders because they produce easy to see tunnels from which to trade as prices reach, or even exceed, the bands.
Veteran analysts and investors often use this information to a) make purchase and sale decisions, and b) to determine where support/resistance levels are, which may also indicate future movement. You’ll see three lines showing the moving average (see above) and standard deviations on the high and low side of the stock price.
John Bollinger is known to the public for his many years of market analysis and commentary on television — first on Financial News Network, where he was the Chief Market Analyst — and subsequently on CNBC. John Bollinger is also well known to professional investors. An avid researcher, he has developed a number of widely used investment tools and analytical techniques. His Bollinger Bands and related tools have been integrated into most of the analytical software and charting platforms currently in use.
Volatility Indicator
The Bollinger Bands are a versatile and dynamic indicator. It can be used by itself or in a combination with another indicator to get a better price entry. The bands measures volatility of a security price over period. Volatility is measured using standard deviation, when there is an increase in the price the bands will widen up. On the other hand, when the price enters in a period of lower volatility the bands will narrow.
Bollinger Bands are made of 3 lines two outer bands and 1 moving average. They are set at 2.0 standard deviation; this means that the price will stay 95% of the time inside the two bands. The center line is a 20-period moving average, (MA).
When there is a strong uptrend, the price will reach the upper band frequently and it will indicate that the stock is moving higher and there is a lot of buying interest in the stock. The opposite is true when the the price reaches the lower band.
