Bollinger Bands® are highly technical tools that give traders an idea of where the market is moving based on prices. It involves the use of three bands—one for the upper level, another for the lower level, and the third for the moving average. When prices move closer to the upper band, it indicates that the market may be overbought. Conversely, the market may be oversold when prices end up moving closer to the lower or bottom band.
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The Bottom Line
ByadminWhile every strategy has its drawbacks, Bollinger Bands® are among the most useful and commonly used tools in spotlighting extreme short-term security prices. Buying when stock prices cross below the lower Bollinger Band® often helps traders take advantage of oversold conditions and profit when the stock price moves back up toward the center moving-average line.
Examples of Bollinger Bands
ByadminThe chart below is of American Express (AXP) from the start of 2008. You can see that for the most part, the price action was touching the lower band and the stock price fell from the $60 level in the dead of winter to its March position of around $10. In a couple of instances,…
Are There Any Limitations to Bollinger Bands?
ByadminYes. One of the main limitations is that it shouldn’t be used as a standalone tool. In fact, Bollinger Bands® should be used with other non-correlated indicators. Doing so may give you additional market signals that are much more direct. Another drawback is that they are calculated using a simple moving average. That’s because older price…
Understanding Bollinger Bands
ByadminBollinger Bands® consist of a centerline and two price channels or bands above and below it. The centerline is typically a simple moving average while the price channels are the standard deviations of the stock being studied.2 The bands expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern…
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Drawing the Lines
ByadminUpper resistance and lower support lines are first drawn and then extrapolated to form channels within which the trader expects prices to be contained. Some traders draw straight lines connecting either tops or bottoms of prices to identify the upper or lower price extremes, respectively, and then add parallel lines to define the channel within…