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Unformatted text preview: tum, moving averages and retracements, can then be employed to help determine the direction of the potential breakout. </p> <p>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.</p> <p>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.</p> <p>Bollinger Bands are useful for determining whether current values of a data field are behaving normally or breaking out in a new direction. For example, when the closing price of a security increases above its upper Bollinger Band, it will typically increase in that direction.</p> <p>Bollinger Bands can also be used for identifying when trend reversals may occur. New highs or lows outside of the bands followed by another high/low inside of the bands typically indicates a reversal in the current trend.</ p> <p>Since the standard deviation can be used as a volatility indicator, the current width of the envelope can also be used for trend information. A wide envelope indicates a high amount of volatility, while a narrow envelope indicates a lower amount. High volatility levels can sometimes be used to time trend reversals, such as market tops and bottoms. Low volatility levels can sometimes be used to time the beginning of new upward price trends following periods of consolidation.</ p> <p>Another observable trait of Bollinger Bands is that moves that begin at one band tend to go all the way to the other band. This can be useful for forecasting future values. Bollinger Bands are similar to Trading Bands and share many of their characteristics. However, unlike Bollinger Bands, Trading Bands do not vary in width based on volatility.</p> In this example Microsoft is charted using 20 day Bollinger bands at 2 standard deviations.<br/> <img recindex="00001"/><p>Contracting bands warn that the market is about to trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is ofte...
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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.
- Spring '10