How to use Bollinger bands
When trading in the stock market, one needs to take care of a couple of things. There is no ultimatum. All factors are related. The ups and downs are indicated by a chart known as Bollinger Bands. This chart indicator initially developed by John Bollinger is used to measure a market’s volatility.
By volatility what is meant is how fluctuating the price of a particular stock is. If when the price is quite I.e. the market is quite the bands used in the chart contract. Similarly, when the price changes either go up or down, the bands expand accordingly indicating the market’s movement too. Thus bands of the Bollinger bands indicator automatically widen when volatility increases and narrow when volatility decreases. This up and down is measured based on a average reading, I.e. an average standard band. Basically, Bollinger bands are three lines (˘bands); one being the middle base, while the other two being the standard deviations up and down.
The basic idea behind the development of this band indicator is to understand the trend in which the price of a stock tends to return to the middle of the bands, I.e. to the average value. The very importance of the Bollinger bands lies in the fact that just by looking at the trend one can predict where the stock will go next, I.e. will it go up or go down. This basic idea helps traders to invest their stocks accordingly. This is helpful for both long term or short term investors.
This tendency of getting back to the average is technically termed as Bollinger Bounce.
The longer stretch of bands followed, the stronger idea one will have regarding the market behavior.
However, there is one more popular way of following the Bollinger bands, especially when the market is trending.
This is by keeping a track of the “Bollinger Squeeze”. According to this strategy, if the highs are above the average high, then the market tends to rise up, I.e. it can reach its “top high” and vice versa. Thus if one can keep a note of a few weeks or months, then one can easily have an idea of the stock’s behavior.
There are several other factors to look out for in the Bollinger bands since these bands have a lot to offer. However, these two being the most popular and easy to implement trading strategies when dealing with Bollinger bands.
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