Bollinger Bands Stocks Technical Analysis and Bollinger Stocks Signals

Developed by John Bollinger

Bollinger bands are formed by three lines. The middle line is a Moving Average - 20 period Simple Moving Average.

The bands are then drawn at a distance away from the moving average These are the bands that form the lower and upper lines.

The distance where the bands are drawn is determined by another indicator called the standard deviation. Standard deviation is a measure of volatility in the stock trading market or that of a stocks.

Since the stocks market volatility keeps on changing, the standard deviation will keep varying, and since Bollinger bands are drawn using the standard deviation the distance of the bands will keep on adjusting themselves to the stocks market conditions.

When the stocks markets become more volatile, the bands widen and they contract during less volatile periods.

The 3 Bands are designed to encompass the majority of a stocks price action. The middle band forms the basis for the trend, typically a 20-periods simple moving average.

This band also serves as the base for the upper and lower bands. The upper band's and lower band's distance from the middle band is determined by volatility. The upper band is drawn at +2 standard deviations above the middle band while the lower band is drawn at -2 standard deviations below the middle band.

Stocks Technical Analysis and How to Generate Signals

• Bands provide a relative definition of high and low

• Used to identify periods of high and low volatility

• Used to identify periods when prices are at extreme levels

Consolidation

The bands tighten as volatility lessens, this identifies periods of consolidation. Sharp stocks price break-outs tend to occur after the bands tighten.

Consolidation Pattern

Continuation Signal

If stocks prices break through the upper or lower band move outside the bands a continuation of the current stocks trend is expected.

Reversal Stocks Signals

Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend

The Head Fake - Stocks Trading Whipsaw

Traders should be on the lookout for false breakouts known as whipsaws or head fakes.

Stocks Price often breaks out in one direction immediately following the Squeeze causing many traders to think the breakout will continue in that direction, only to quickly reverse and make the true, more significant breakout in the opposite direction.

Traders acting quickly on the initial breakout often get caught on the wrong side of the stocks price action, while those traders expecting a "false breakout" can quickly close out their original position and enter a trade in the direction of the reversal. It is always good to combine Bollinger bands with other confirmation Indicators.