What Does It Mean?
Bollinger Bands are similar to Trading Bands (Envelope).
The difference between Bollinger Bands and envelopes is that envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average.
Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods.
Bollinger Bands were created by John Bollinger
Putting It To Use [Bollinger Bands Tutorial]
Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an any indicator.
The basic interpretation of Bollinger Bands is that price movement tend to stay within the upper and lower band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices.
During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices.
Mr. Bollinger notes the following characteristics of Bollinger Bands:
- Sharp price changes tend to occur after the bands tighten, as volatility lessens.
- When prices move outside the bands, a continuation of the current trend is implied.
- Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.
- A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.
bye
Ashok
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