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Unformatted text preview: indicator and one volume indicator successfully. </p> <p>6. Bollinger Bands can also be used to clarify pure price patterns such as "M" tops and "W" bottoms, momentum shifts, etc. </p> 7. Price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band. <br/> <p>8. Closes outside the Bollinger Bands are continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.) </p> <h3>9. <p>The default parameters of 20 periods for the moving average and standard deviation</p></h3> <p>calculations, and two standard deviations for the ban#dwidth may be varied for the market. </p> <p>10. The average deployed should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-term trend. </p> <h3>11.<p> If the average is lengthened the number of standard deviations needs to be increased</p></h3> <p>simultaneously; from 2 at 20 periods, to 2.5 at 50 periods. If the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.5 at 10 periods. </p> <p>12. Bollinger Bands are based upon a simple moving average. This is because a simple moving average is used in the standard deviation calculation and we wish to be logically consistent. <br/> 13. Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The sample size in most deployments of Bollinger Bands is simply too small for statistical significance. </p> <h3>14.<p> Finally, tags of the bands are just that, tags not signals. Touching the upper band is NOT in</p></h3><p>and-of-itself a sell signal and touching the lower band is NOT in-and-of-itself a buy signal. </p> <p>Again, this indicator consists of three bands encompassing a security's price action. Defaults are:</p> <h3>1. <p>A simple moving average in the middle, usually 20 days for intermediate investing.</p> 2. <p>An upper band ( 20 day SMA plus 2 standard deviations)</p> 3. <p>A lower band (20 day SMA minus 2 standard deviations)</p></h3> <p>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.</p> <p>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.</p> <p>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 s...
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- Spring '10