Bollinger Bands® are tools used in technical analysis. They were designed by John Bollinger, a technical trader. The bands are used to generate signals for securities that are oversold or overbought. The bands are composed of different lines that are plotted on a chart, including the moving average, an upper band, and a lower band.
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Examples of Bollinger Bands
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The 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,…
Drawing the Lines
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Upper 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…
The Bottom Line
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While 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.
What Do Bollinger Bands Tell You?
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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…
Understanding Bollinger Bands
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Bollinger 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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