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Bollinger Bands Technical Analysis Indicator Explained

bollinger bands

You shouldn’t overestimate the capabilities of the Bollinger Bands either. This indicator needs to be tested with your trading strategy. This is the only way you can understand whether this indicator is useful to you or not.

  • In fact, there are a number of uses for Bollinger Bands®, such as determining overbought and oversold levels, as a trend following tool, and for monitoring for breakouts.
  • The strategy was correct in using the lower Bollinger Band® to highlight oversold market conditions.
  • This phenomenon can also be used as a signal for the end of market consolidation.
  • Defined as a degree of positive or negative price variation over time, volatility is generally measured through standard deviation.
  • To simplify the Bollinger Band calculation, you can use an Excel spreadsheet, which I will discuss below.
  • Chart 5 shows Pulte Homes (PHM) within an uptrend in July-August 2008.

These parameters can be adjusted to meet your technical analysis needs. Because Bollinger Bands are a particularly visual technical indicator, those dynamic changes in volatility are easy to see on a price chart, especially at the extremes. Although traders may use the bands to gauge the trends, they cannot use the tool alone to make price predictions.

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It allows you to accurately identify the buy, sell and profit-taking zones. This will increase your trading discipline and help you avoid unnecessary mistakes at the very beginning. The Bollinger Bounce strategy involves trading on developing trends. In an uptrend, we will look for the moment when the price action rolls back down, touches or almost touches the lower band. In a downtrend, on the contrary, we need a moment when several candles go up and stop at the border of the upper band and identify the m tops.

bollinger bands are often used to identify M-Tops and W-Bottoms or to determine the trend’s strength. This article is intended for educational purposes only and not as an endorsement of a particular financial strategy. Encyclopædia Britannica, Inc., does not provide legal, tax, or investment advice.

Which Indicators Work Best with Bollinger Bands®?

First, the stock formed a reaction low in January (black arrow) and broke below the lower band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, the signal is not affected since, like Bollinger Bands, it is calculated using closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high.

  • Further, the pair of bands is not intended to be used on its own.
  • Upon reaching its peak, the first shoulder is crossed by the Bollinger Wave indicator (blue arrow).
  • A more aggressive trader might choose to stay in the long trade and chase more significant profits.
  • If an uptrend is strong enough, it will reach the upper band regularly.

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