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Bollinger Bands Oscillator
Bollinger Bands Oscillator
 

Implication

When the price crosses one of the Bollinger band (upper or lower), a bullish or bearish event is generated depending on the direction of the crossovers.

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Description

Bollinger bands use standard deviation and a moving average to help traders determine buy and sell events, or to help confirm other patterns. A price chart that uses Bollinger bands displays four lines; price, the upper and lower Bollinger bands, and the moving average.

The upper and lower Bollinger bands typically appear 2 standard deviations above and below the 20-day moving average. Recognia supports these typical settings.

For shorter-term trends, some technical analysts prefer 1 1/2 standard deviations with a 10-day moving average. For longer-term trends, a 2 1/2 standard 50-day moving average may better suit their purposes.

Price tends to bounce between the upper and lower Bollinger bands. The width between the bands does not remain constant. Typically, the expansion or contraction of the bands indicates periods of high or low volatility.

Bollinger Bands

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Trading Considerations

In Technical Analysis Explained, Martin J. Pring describes how he interprets price charts that use Bollinger bands. Here is a summary of what he keeps in mind when making trading decisions:

  • When the bands contract, price is considered more volatile. A price breakout may occur. Likewise, when the bands expand, price is considered less volatile.
  • When the price touches or exceeds either the upper or lower bands, an event is signalled, as the price trend generally continues. However, use the event as an indicator only, as price may reverse.
  • To determine whether a price reversal is imminent, observe how price behaves following the initial crossing. If the price makes several failed attempts to cross or touch a band again, you may see a price trend reversal.

Use Bollinger bands to help you monitor and predict price behavior. However, John Bolllinger himself acknowledges that other factors, such as RSI and patterns, should be considered for trading decisions.