Back in the 1980s, John Bollinger, a veteran industry technician, invented the Bollinger Bands. He thought about using the moving average, which he put into two trading bands, one above and one below. The key principle of this method is to add and subtract the calculation of the standard deviation. This is a method to measure the volatility, indicating the variance of the stock price.
Since they calculate the price volatility, the Bollinger Bands help the investor adapt to market conditions. There are all the price details that one might require between these two bands.
What are Bollinger Bands and how to use them
The center line of the Bollinger Bands is the exponential moving average. The different price channels that accompany it up and down are the stock variants. If the price increases and becomes more unpredictable, all bands extend and contract.
It is also worth discussing that, as stock values keep reaching the upper band, prices are over-purchased. If they hit the lower one, that means the prices are over-sold. There are also various ways to trade through bands. Some of the most common bands currently, besides the Bollinger Bands, are Keltner, Donchian, and Percentage.
If traders use Bollinger Bands, they typically consider the top and bottom bands as price targets. Thus, in the event that the price departs from the lower one and above the center line (the 20-day average), the upper band then becomes the upper price target.
When prices shift between the 20-day moving average and the upper band, it’s certainly a major uptrend. In this scenario, going just under the 20-day average could mean a reversal of the pattern.
As we have already said, there are a lot of specifics to the Bollinger Bands that traders should come to understand. Those are only the most prominent considerations that can help people realize what they are and what they can use them for.
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