A Lesson on Bollinger Bands
for active traders and
investors using technical
analysis in the forex,
futures, and stock markets.

The link that I refer to on
Standard Deviation is here:
http://en.wikipedia.org/wiki/S
tandard...

The link that I refer to with
more resources on Bollinger
Bands is here:

http://
more

A Lesson on Bollinger Bands
for active traders and
investors using technical
analysis in the forex,
futures, and stock markets.

The link that I refer to on
Standard Deviation is here:
http://en.wikipedia.org/wiki/S
tandard...

The link that I refer to with
more resources on Bollinger
Bands is here:

http://www.informedtrades.com/
tags/in...

In our last lesson we learned
about the Stochastic
Oscillator and how traders use
this in their trading. In
today's lesson we are going to
learn about an indicator which
helps traders gauge the
volatility and how current
prices compare to past
prices.




Bollinger Bands are comprised
of three bands which are
referred to as the upper band,
the lower band, and the center
band. The middle band is a
simple moving average which is
normally set at 20 periods,
and the upper band and lower
band represent chart points
that are two standard
deviations away from that
moving average.

Example of Bollinger Bands:

Bollinger bands are designed
to give traders a feel for
what the volatility is in the
market and how high or low
prices are relative to the
recent past. The basic premise
of Bollinger bands is that
price should normally fall
within two standard deviations
(represented by the upper and
lower band) of the mean which
is the center line moving
average. If you are unfamiliar
with what a standard deviation
is you can read about it here
http://en.wikipedia.org/wiki/S
tandard... As this is the case
trend reversals often occur
near the upper and lower
bands. As the center line is a
moving average which
represents the trend in the
market, it will also
frequently act as support or
resistance. The first way that
traders use the indicator is
to identify potential
overbought and oversold places
in the market. Although some
traders will take a close
outside the upper or lower
bands as buy and sell signals,
John Bollinger who developed
the indicator recommends that
this method should only be
traded with the confirmation
of other indicators. Outside
of the fact that most traders
would recommend confirming
signals with more than one
method, with Bollinger bands
prices which stay outside or
remain close to the upper or
lower band can indicate a
strong trend, a situation that
you do not want to be trading
reversals in. For this reason
selling at the upper band and
buying at the lower is a
technique that is best served
in range bound markets.

Example of Buying and Selling
at the Upper and Lower Band:




Large breakouts often occur
after periods of low
volatility when the bands
contract. As this is the case
traders will often position
for a trend trade on a break
of the upper or lower
Bollinger band after a period
of contraction or low
volatility. Be careful when
using this strategy as the
first move is often a fake
out.




Example


As Bollinger bands paint a
good picture directly on the
price chart of how high or low
price is relative to
historical prices, this is a
good indicator to use in
conjunction with other methods
such as some of the chart
patterns that we have learned
so far and some of the
candlestick patterns which we
will learn in future lessons.
Below is one such example:


As Bollinger Bands are one of
the most popular indicators
around I have created a
special page on
InformedTrades.com which lists
multiple resources for those
looking for more information
on trading Bollinger Bands.

That's our lesson for today.
You should now have a good
understanding of Bollinger
bands and how traders use
these in their trading. In our
next lesson we are going to go
over the Average Directional
Index or ADX, which helps
traders identify the strength
or weakness of a trend so we
hope to see you in that
lesson.

As always if you have any
questions or comments please
feel free to have them in the
comments section below, and
have a great day!

Category Howto & DIY

Tags howto, trade, bollingerbands, daytrade, investing, money, finance, business, forex, futures, stock, market, informedtrades