Bollinger band
From Financial Literacy Wiki
Bollinger bandare technical indicators that provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band.This definition can aid it in rigourous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.
Bollinger Bands consist of:
* an N-period moving average (MA) * an upper band at K times an N-period standard deviation above the moving average (MA + Kσ) * a lower band at K times an N-period standard deviation below the moving average (MA − Kσ)
When the bands lie close together (measured vertically), a period of low volatility in stock price is indicated. Whereas when they lie far apart, a period of high volatility in price is indicated. When the bands have only a slight slope and lie approximately parallel for an extended time the price of a stock will be found to oscillate up and down between the bands as though in a channel.
The use of Bollinger band varies widely among traders. Some traders buy when price touches the lower Bollinger Band then sell when price touches the moving average in the centre of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; option traders, most notably implied volatility traders, Often sell options when Bollinger Bands are historically far apart or by options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.
Traders are often inclined to use Bollinger Bands with other indicators to see if there is confirmation. In particular, the use of an oscillator like Bollinger Bands will often be coupled with a non-oscillator indicator like chart patterns or a trendline; if these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater evidence that what the bands forecast is correct.
As can be seen from the derivation of the Bollinger bands, there are two 'moving' parts in getting the Bollinger Bands. Investors when using deriving the Bollinger Bands are strongly advised to experiment with different K's and N's to find a more "accurate" Bollinger Bands that better predicts the movement of the stock price in question.
