Before the internet boom took place, technical analysis was certainly an arcane art and a widespread field of professionalism. Chartists are required to carry out this analysis in their rooms, with the help of information which has been collected through professional resources. In the light of technical analysis, a term which has been known for a long time is Bollinger Bands!
What are Bollinger Bands?
Bollinger Bands were the initiation of the world renowned chartist, John Bollinger, who created these charts back in the early 1980’s – as a technical trading tool. Bollinger Bands were basically the result of the growing need for adaptive trading bands, and the observation which stated that volatility was not static, but dynamic. The technique is basically to use the moving averages with two trading bands and adding or subtracting a standard deviation calculation.
What do Bollinger Bands Measure?
There are basically two tools which are derivative in the Bollinger Bands – the first is the Bandwidth and the second is %b. Bandwidth is basically calculated by dividing the result which comes by subtracting the upper Bollinger Band with the low Bollinger Band, divided with the middle Bollinger Band. This tools is mainly used to quantify the volatility based trading opportunity – or more commonly known as ‘The Squeeze’
The second tool %b is basically the measure of where the last price is, in relation to the Bollinger Bands themselves. The %b is mostly commonly used to clarify the different trading patterns and is calculated by dividing the answer of the last price minus the lower and the upper Bollinger Bands – minus the lower Bollinger Band.
How to Use Them:
Ø The Bollinger Bounce:
The whole idea of the Bollinger Bounce is that the price tends to return to the middle of these bands. The reason behind these bounces is that the bands act like dynamic resistance and support levels. These bounces are best used when the market has no clear trend and is ranging – the bands tend to be stronger, according to the time frame you are in.
Ø The Bollinger Squeeze:
When the bands squeeze together, it is extremely inevitable that a breakout is about to happen. The strategy is mainly designed in order to help traders catch a move as soon as possible. Such breakouts do not happen frequently; however, if you are using a 15-minute chart, you might want to look out for them a few times in a week.
Benefits of Bollinger Bands:
Bollinger Bands can easily be used to trade between different trends. You can also use these carts to identify the early reversal signals, and save yourself from an economic crunch. Moreover, these charts can provide you with viable knowledge, which lets you know how tradable or strong a stock’s move is. Above all, the Bollinger Bands can reveal a great way to trade break outs.
The Bottom Line:
Bollinger Bands provide you with an exceptional breakthrough in the stock market, and help you stay one step ahead of your competitors as well. These charts mainly consist of two strategies, which help you in catching a move as early as possible and developing a strategy when the market is not clear!