Stock Market Trading Using Technical Analysis - Bollinger Bands

Bollinger bands are called after market trader John Bollinger, who in 1970 could not find an analysis of investments that fit his belief about how markets related to each other, so he created his own. He believes that market events exist only in relation to each other and that there are no absolutes.

Bollinger bands, like other bands, or envelopes are constructed above and below a certain central point, in this case, an average. Many computer programs allow the user to define the width of the bands, by increasing or decreasing the distance above and below the moving average. Using trial and error, you may find that different markets require different values. In general, the bands are designed to use a moving average 20 days and the bands are moved up or down to contain 95% of the data points. Some may see this as a plus or minus 2 standard deviations.

Using the bands to determine the price movement can be difficult and requires some study of the market you intend to trade. In general, the price tends to touch a band (upper or lower), then move on to touch the band. This, of course, depends on where the price is based on the age of its tendency. During a bull market, for example, the price touches the upper band, pull back the moving average, then tap the upper band again. The price can also ride the high end for a while ', before moving over the banda or pulling back inside the band.

The price may be outside the band for a period of time, but usually when that happens the price tends to pull back in the band and heads for the moving average. If the moving average support price, the price can move up, but if support fails, the price will tend to move to the lower band. Once the price hits the lower band, the price generally moves back the moving average. This trend is important to point that if the moving average provides resistance to further price appreciation, the trend may change and begin a bear market.

It 'important to study the graphs and define the trading rules before you engage in trading the markets. Prices and Bollinger Bands react differently and there is a definition that fits the model for all the time .......