Bollinger Bands – A Closer Look at a Powerful Indicator

The Bollinger Bands technique uses elements of statistics, supply management and technical examination in order to come up with a set of bands which will help contain normal price action. The upper Band should not be breached without some action from the trader to buy or sell the security. In addition, the lower band should not be crossed without some action from the seller. The middle band is determined using statistical methods such as moving averages and exponential moving averages. These two tools are excellent to use because they take into account both historical and current price actions of the securities. Not only will Bollinger Bands help traders make better trades, they will also encourage traders to combine other methods of technical examination to come about the best prediction possible.

Identifying And Using Bollinger Bands

There are many indicators which are used in Bollinger Band examination, which was developed by John Bollinger in the 1980s. Mr. Bollinger used his knowledge of finance, statistics and securities trading to come about these techniques. His indicators are used by every technical trader that incorporates the Bollinger Bands technique.

Percent B And BandWidth

There are two main indicators derived from a bandwidth technique. The first of these is called Percent B, otherwise known as %b. The other main derivative is called BandWidth. Both of these together should be used in order to make the best examination. Percent B came from the technique of Stochastics and identifies the location of the price. Percent B acts as a compass for traders letting them know where they are in relation to the upper band, the middle band and the lower band. In order to calculate Percent B exactly, it is given the value of 1 for the upper band and 0 for the band at the lower end. The calculation using the Percent B function is that Percent B is equal to the last price for a security minus the lower Band. This difference is then divided by the difference of the upper Band minus the lower Band.

For BandWidth, traders can be calculated as the difference of the upper Bollinger Band minus the lower Bollinger Band, and this is then divided by the middle moving average. Most traders will look at a historical time period of twenty periods in order to calculate standard deviations. In this case, BandWidth is equivalent to approximately four times the value of the coefficient of variation for the twenty period time window. Bandwidth can be used to clarify certain opportunities which come from extremes conditions of volatility and identification.

Bollinger Bands In Action

There have been many uses of Bollinger Bands in functional use, ranging from academic to industrial. One of the markets most affected by the use of new financial tools and prediction methods is China, where the Bands have been adopted in order to predict price movements in the stock and commodity markets. One example showed that impressive positive returns could be had when Bollinger Bands techniques were used in conjunction with the crossover rule for moving averages. Profits were booked already after taking into consideration the transaction and administrative costs of booking the profit.

While there have been examples of success using a strict Band technique, several other studies have shown that an approach using just technical examination may have disadvantages to one which also incorporates basic examination techniques such as industry information and economic data.

Bollinger bands are a very powerful trading tool, if you trade stocks or forex you must incorporate this indicator into your toolbox.

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