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Bollinger Bands
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Bollinger Bands

Bollinger Bans were developed by John Bollinger. They are a set of bands that are plotted at 2 standard deviations above and below an exponential moving average (20-day is widely used) and are displayed over a stock's price chart. Using 2 standard deviations guarantees 95% of the price data will lay between the bands.

Since the bands are plotted at standard deviation levels, they are self-adjusting. When a stock becomes more volatile, the bands widen to give the stock more “room to move” within the bands. When a stock meanders around with little day-to-day movement, the bands contract.

Because of the tendency for a stock to stay within the bands, prices are considered overbought when they reach the upper band and oversold when they reach the lower band.

Bollinger offers the following characteristics:

•  Expect sharp prices changes after volatility lessens and the bands narrow.
•  When a stock moves outside the bands, expect the trend to continue.
•  A reversal usually occurs after a bottom or top is made outside the bands and then the underlying issue moves back inside the bands.
•  Prices tend to move from one band to the other, so this can aid in projecting price targets.




Here is a typical set of Bollinger Bands with VECO. You can see how the stock spends most of its time within the bands and the general tendency to move back and forth between the bands. Used in conjuction with other indicators for confirmation, buying at the bottom band and selling at the top would provide consistent profits.



This REMC chart reveals a stock's tendency to reverse after breaking through one of the bands and then pulling back within the bands.



This XICO chart demonstrates two Bolliger Band principals. First is the tendency for a stock to experience a big move after the bands have narrowed. You can see this in late June. Second, when the stock moved outside the top band, although the stock did pull back, the uptrend continued.


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