Bollinger
Bands
What are
Bollinger Bands?
A Bollinger Band is technical indicator used to
measure market volatility. The bands are self-adjusting and will widen as the
market gets more volatile, and contract during calmer periods.
Bollinger Bands consist of 3 lines:
Bollinger Bands consist of 3 lines:
- Upper Band (Middle band + 2 standard deviations)
- Middle Band (20-period Simple Moving Average)
- Lower Band (Middle band – 2 standard deviations)
The middle band is a simple moving average that is
set at 20 periods by default. The upper and lower bands are set 2 standard
deviations above and below the middle band.
How to use
Bollinger Bands?
There are 3 ways to use Bollinger Bands:
- Bollinger Squeeze
- W-Bottoms
- M-Tops
Bollinger Squeeze
When the market enters a consolidation period and there is not much volatility, the upper and lower bands will start to move closer to each other. When the Bollinger bands become narrow, it can signal a big trend when the bands start to expand again.
As seen from above, the bands will first start to
narrow before it expands again. Traders can buy or sell depending on which band
the price breaks out of. If the price breaks out of the upper band, traders can
buy. When price breaks out of the lower band, traders can sell.
W-Bottoms
W-Bottoms can be used to produce buy signals.
A W-Bottoms involves 4 steps:
1.
The first low is
formed
2.
The price
bounces back to the middle band
3.
The second low
forms lower compared to the first low, but stays above the lower band
4.
Price moves off
the second low and there is a resistance break
As seen from above, traders can start to buy after
price goes through the resistance.
M-Tops
M-Tops can be used to produce sell signals
A M-Top involves 4 steps:
1.
The first high
is formed
2.
The price
bounces back to the middle band
3.
The second high
forms higher compared to the first high, but stays below the upper band
4.
Price moves off
the second high and there is a resistance break
As seen from above, traders can start to sell after
price goes through the resistance.
Done By: Kelvin Chong
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