Technical Stock Analysis - Bollinger Bands and RSI

Bollinger bands are essentially moving standard

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Unformatted text preview: eriods and contract during less volatile periods. Bollinger Bands are, essentially, moving standard deviation bands. </p> <p>Bollinger Bands are sometimes displayed with a third center line. This is the simple moving average line. Mr. Bollinger recommends using a 10 day moving average for short term trading, 20 days for intermediate term trading, and 50 days for longer term trading.</p> <p>The standard deviation value may be varied. Increase the value of the standard deviation from 2 standard deviations to 2-1/2 standard deviations away from the moving average when using a 50 day moving average. Conversely, lower the value of the standard deviation from 2 to 1-1/2 standard deviations away from the moving average when using a 10 day moving average. </p> <p>Bollinger Bands do not generate buy and sell signals alone. They should be used with another indicator. I use them with RSI, described below. This is because when price touches one of the bands, it could indicate one of two things. It could indicate a continuation of the trend; or it could indicate a reaction the other way. By themselves they do not tell us when to buy and sell. </p> <p>However, when combined with an indicator such as RSI, they become powerful. RSI is an excellent indicator with respect to overbought and oversold conditions. When price touches the upper band, and RSI is below 70, we have an indication that the trend will continue. When price touches the lower band, and RSI is above 30, we have an indication that the trend will continue. </p> <p>If we run into a situation where price touches the upper band and RSI is above 70 (possibly approaching 80) we have an indication that the trend may reverse itself and move downward. On the other hand, if price touches the lower band and RSI is below 30 (possibly approaching 20) we have an indication that the trend may reverse itself and move upward. </p> <p>Avoid using several different indicators all using same input data. If you're using RSI with the Bollinger Bands, don't use MACD too. They both use the same inputs. Consider using On Balance Volume, or Money Flow with RSI. Relying on different inputs they measure different things. They can be used together as further confirmation of a trend. </p> <p>While there are many ways to use Bollinger Bands, following are a few rules that serve as a good beginning point. </p> 1. Bollinger Bands provide a relative definition of high and low.<br/> <p>2. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions. </p> <p>3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc. </ p> <p>4. Volatility and trend have already been deployed in the construction of Bollinger Bands, so their use for confirmation of price action is not recommended. <br/> 5. The indicators used should not be directly related to one another. For example, you might use one momentum...
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This note was uploaded on 11/10/2010 for the course REFERENCE reference taught by Professor Alex during the Spring '10 term at Chowan University.

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