Best use Bollinger Bands what you not know
By the first part of Bollinger Bands we stand for second part. Now we go for Best use Bollinger Bands what you not know. To remember , You don’t find anyone who are not hear the name of Bollinger Bands .In Forex trading, Options Trading Strategies – Online Forex Trading – Stock Options Trading – Online Stock Trading as well as casino also in bond market Bollinger Bands are the common trading instrument. But Most of the people do not know what is that. They only use it by default. You have to know about Bollinger Bands if you want to make money fast. Lets know how to use it.
Again, this indicator consists of three bands encompassing a security’s price action. Defaults are:
1. A simple moving average in the middle, usually 20 days for intermediate investing.
2. An upper band ( 20 day SMA plus 2 standard deviations)
3. A lower band (20 day SMA minus 2 standard deviations)
Standard deviation is a statistical term that provides a good indication of volatility. Using it ensures the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price changes and hence volatility, will lead to a widening of the bands. Closing prices are usually used to compute Bollinger Bands. Other variations can also be used.
The length of the moving average and number of deviations can be adjusted to better suit individual preferences and specific characteristics of a security. One method to determine an appropriate moving average length is a visual assessment. Bollinger Bands should encompass the majority of price action, but not all. After sharp moves, penetration of the bands is normal. If prices appear to penetrate the outer bands too often, then a longer moving average may be required. If prices rarely touch the outer bands, then a shorter moving average may be required.
A more exact method to determine moving average length is by matching it with a reaction low after a bottom. For a bottom to form and a downtrend to reverse, a security needs to form a low that is higher than the previous low. Properly set Bollinger Bands should hold support established by the second (higher) low. If the second low penetrates the lower band, then the moving average is too short. If the second low remains above the lower band, then the moving
average is too long.The same logic can be applied to peaks and reaction rallies. The upper band should mark resistance for the first reaction rally after a peak.
In addition to identifying relative price levels and volatility, Bollinger Bands can be combined with price action and other indicators to generate signals and foreshadow significant moves:
Double bottom buy: A double bottom buy signal is given when prices penetrate the lower band and remain above the lower band after a subsequent low forms. Either low can be higher or lower than the other. The important thing is that the second low remains above the lower band. The bullish setup is confirmed when the price moves above the middle simple moving average.
Double top sell: A sell signal is given when prices peak above the upper band and a subsequent peak fails to break above the upper band. The bearish setup is confirmed when prices decline below the middle band. Sharp price changes can occur after the bands have tightened and volatility is low. In this instance, Bollinger Bands do not give any hint as to the future direction of prices. Direction must be determined using other indicators and aspects of technical analysis. Many securities go through periods of high volatility followed by periods of low volatility. Using Bollinger Bands, these periods can be easily identified with a visual assessment. Tight bands indicate low volatility and wide bands indicate high volatility.
Again, although Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a security. The bands were designed to augment other analysis techniques and indicators. By themselves,
Bollinger Bands serve two primary functions:
• To identify periods of high and low volatility
• To identify periods when prices are at extreme, and possibly unsustainable, levels.
As stated above, securities can fluctuate between periods of high volatility and low volatility. Being able to identify a period of low volatility can serve as an alert to monitor the price action of a security. Other aspects of technical analysis, such as momentum, moving averages and retrenchments, can then be employed to help determine the direction of the potential breakout.
Remember, buy and sell signals are not given when prices reach the upper or lower bands. Such levels merely indicate that prices are high or low on a relative basis. A security can become overbought or oversold for an extended period of time. Knowing whether prices are high or low on a relative basis enhances interpretation of other indicators and timing issues in trading.
Bollinger Bands are a pair of values placed as an “envelope” around a data field. The values are calculated by taking the moving average of the data for the given period and adding or subtracting the specified number of standard deviations for the same period from the moving average. Since Bollinger Bands use a moving average, the value at the beginning of a data series is not defined until there are enough values to fill the given period. Used to confirm trading
signals, normally from a Momentum Indicator, the bands indicate overbought and oversold levels relative to a moving average.
The bands are calculated at specified standard deviations above and below the moving average, causing them to widen when prices are volatile and contract when prices are stable. Bollinger Bands are useful for determining whether current values of a data field are behaving normally or breaking out in a new direction.
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