Bollinger bands analysis example

Bollinger Bands [ChartSchool]

 

bollinger bands analysis example

Oct 24,  · Kno What is Bollinger Bands in technical analysis with example, formula, indicator, adequate graphs, trading strategy and how it works. Using Bollinger Bands in Technical Analysis Bollinger Bands help your analysis by answering two questions: Is the stock overbought or oversold? Is the volatility expanding or contracting? But you can’t simply answer these questions in a vacuum, you must understand what’s going on in the context of market cycles. MARKET CYCLE THEORY. Bollinger Bands are a technical analysis tool, specifically they are a type of trading band or envelope. Trading bands and envelopes serve the same purpose, they provide relative definitions of high and low that can be used to create rigorous trading approaches, in pattern. recognition, and for much more.


A complete explanation of Bollinger Bands


As creatures of emotion, we crave predictability and order. We struggle to find patterns in its absence. As today is the first day of the remainder of our lives, so you and I, being a participant in the stock market, should take it seriously. Go on reading, you will be able to relate it soon.

Market also vibrates. Yes, there is a term called volatility which is inseparably interrelated to the financial market. If you and I could do that, by now we would have been on the list of top five richest persons in the world. Median and expected do not mean the same thing at all in the financial world.

The terms bullish and bearish are often hollow words with no application in a world of randomness — particularly if such a world, like ours, present asymmetric outcomes. Is it reasonable to take that volatility as a constant over time?

I think not. You must be knowing that the sharpest of all sharp brains are involved in this stock market with different mathematical models and statistical tools to quantify volatility and estimating the underlying price.

It is beyond the scope of this article to articulate those complex structures in words. To keep it simple and precise for trading, it would be better to study the Bollinger bands. These bands are volatility indicators similar to the Keltner Channel. Except that Bollinger Bands are placed two standard deviations above and below the moving average which is usually 20 days.

Two trading bands are placed around a moving average similar to the envelope technique. The values for N and K are 20 and 2. Normally Simple Moving Average is preferred to Bollinger bands analysis example Moving Average because it is used in calculating the volatility used to set the bandwidth, hence, it is internally consistent to use the same average to set the center point.

Moreover, for both the middle band and calculation of standard deviation usually, the same period is used. For a 20 day average, the most recent 20 days are used. The same is true for volatility; for each period, the volatility is measured using the immediately preceding periods. You must be knowing that Standard Deviation S. Surprisingly you will find that as you shorten the calculation period, you will need to reduce the number of standard deviations used to set the bandwidth and that as you lengthen the number of periods, you will need to widen the bandwidth.

According to Bollinger if you use a starting point of 2 standard deviations and a period calculation, you should decrease the bandwidth to 1. But none of bollinger bands analysis example strategies are more important than the evolution of the markets.

If the period is less than 10 or greater than bollinger bands analysis example, changing the periodicity of the bars is more appropriate.

Suppose if you require a shorter calculation period than 10 days, a shift to hourly bars might be better than trying to squeeze the calculation period ever tighter. I want to add one more variation of Bollinger, i. It can be done in two ways. The other is to plot multiple sets of bands with different parameters, say 20 bollinger bands analysis example and 2 standard deviations and 50 periods and 2.

As a thumb rule, prices are considered to be overextended on the upside overbought when they touch the upper band, bollinger bands analysis example. They are considered overextended on the downside oversold when they touch the lower band. The statistical concept behind the technical terms overbought and oversold is that as prices depart from the average, bollinger bands analysis example, you and I should expect them to move back toward the average.

Note: Bollinger bands are used to provide a relative definition of high and low. At the upper band, prices are high and vice-versa. It helps us in pattern recognition and developing our own strategy. I want to provide another information, bollinger bands analysis example. Bollinger further developed 3 new indicators based on his own bands, bollinger bands analysis example. BBImpulse — It helps to measure the change in price as a function of the bands, bollinger bands analysis example.

Bandwidth delta — It helps to quantify the changing width of the bands. Using Bollinger Bands as targets By now you must have got an idea about the use of Bollinger bands.

The most common way to use it is keeping the upper and lower bands as price targets. Suppose bollinger bands analysis example prices bounce back from the lower band and cross above the day average, then the upper band becomes the price target on the upside and bollinger bands analysis example. Normally bollinger bands analysis example price level oscillates inside the upper band and the 20 day average in case of a strong uptrend, whereas it just the opposite in case of a strong downtrend.

During a period of rising price volatility, the distance between the two bands will widen, whereas during a period of low volatility the bands will contract. Usually, the contraction and extraction come alternately. I will break it down for better clarity. Before proceeding further you should know that volatility is cyclical even when the price is not. The Squeeze Please remember these points. During a period of low volatility, the bands come closer bollinger bands analysis example the moving average.

This rule is never broken. When volatility falls to historically low levels, the squeeze is on, bollinger bands analysis example. Normally the squeeze is triggered when bandwidth drops to its lowest level in six months. Often as the end of a squeeze nears, bollinger bands analysis example, the price will stage a short fake-out move, and then abruptly turn and surge in the direction of the emerging trend.

The Squeeze To deal with the head fake, you can wait for the move to develop sufficiently so that there is a little question about the nature of the emerging trend.

Or if you want to trade the squeeze right from the beginning you can take an initial position in the direction of the fake and use the trailing stop loss technique.

After low volatility, high volatility comes to the table. Hence, when a powerful trend is born, volatility expands so much that the lower band will turn down in an uptrend and vice-versa.

But you know it works very well when combined bollinger bands analysis example other indicators and oscillators. The Breakout Usually, the maximum lifespan of the price movement occurs inside the two bands. When the price breaches on either bollinger bands analysis example it is called breakouts. When combined with other factors it can provide some clues, bollinger bands analysis example. The Breakout The Pinch For simplicity, you should consider this point as well.

As mentioned earlier that expansion follows contraction and the process is repeated. Hence, when the level of volatility decreases from an expansion phase, it is sometimes known as pinch pattern. The Pinch As you know that a table looks stable in four legs, sometimes three is okay but less than that it behaves like a drunken person.

Likewise any trade irrespective of trend following, contrarian or swing you should consider at least three conditions to fulfill. It will not only help you to make better actions but also will gradually get reflected in your portfolio. Price as a dancer gives a signal Laughing? Okay, enjoy the dance. There are two forms of signals, i. M-Top and W-Bottom. Among the possible patterns that can form M-Top are double tops, head and shoulders, bollinger bands analysis example, and diamonds.

The ideal M-Top is formed when Step 1 The price level makes a high outside the upper band or at least touch the upper band Step 2 The price is pulled back towards the middle band Step 3 Price level bounces back towards the upper band, bollinger bands analysis example. Moreover, the weakness of the trend is reflected when the second high fails to touch the upper band. The momentum loses its strength and has a possibility to reverse.

Considering other factors one can easily go for a contra trade. W-Bottom Just like the M-top, the possible patterns that can form W-Bottom are double bottoms, inverted head, bollinger bands analysis example, and shoulders. The ideal W-Bottom is formed when Step 1 The price level makes a low outside the lower band or bollinger bands analysis example least touch the lower band Step 2 The price is bounced back towards the middle band Step 3 Price level is pulled back towards the lower band.

Ideally should be higher than the prior low and above the lower band Step 4 Volume will be higher on the first decline than on the second W Bottom This bottoms act as a warning sign. Moreover, the weakness of the trend is reflected when the second low fails to touch the lower band. You know along with volume indicators momentum indicators can be very useful in the diagnostic process. As you know that each indicator operates independently of the other, so when they signal together, they afford a high level of confidence in the outlook for the stock.

Bollinger Bands Trading Strategy One should actually buy when the upper band is exceeded and short when the lower band is broken to the downside One should buy on strength as one approach the upper band only if an indicator confirms and sell on weakness as the bollinger bands analysis example band is approached, if and only if bollinger bands analysis example by other indicators One should buy near the lower band, using a W pattern and an indicator to clarify the setup and vice-versa Bottomline Some of the concepts mentioned here are the results of my speculation based on the theories of John Bollinger and John Murphy.

You must be knowing that cells that fire together, wire together. Be free to leave your suggestions or comments or questions in the space below. Related Posts:.

 

Top 6 Bollinger Bands ® Trading Strategies

 

bollinger bands analysis example

 

Mar 31,  · Bollinger Bands Calculation: [1] Upper Band = Middle band + 2 standard deviations. Middle Band = period moving average (most charting packages use the simple moving average) Lower Band = Middle band – 2 standard deviations. The below chart illustrates the upper and lower bands. What are the components of Bollinger band? Bollinger band has three important dynamic lines 1. Middle Bollinger Band - This is a plot of 20 period simple moving average. 2. Lower Bollinger Band - Middle band - 2 * 20 period standard Deviation. 3. Upper Bollinger Band - Middle band + 2 * 20 period standard Deviation. Concept of Bollinger Band. Bollinger Band indicates volatility around price of a . Apr 23,  · In this example of Bollinger Bands®, the price of the stock is bracketed by an upper and lower band along with a day simple moving average. Because standard deviation is a measure of volatility, when the markets become more volatile, the bands widen; during less volatile periods, the bands contract. Next Up.