Bollinger Bands
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Bollinger Bands in technical analysis are two moving average bands placed around the top and bottom of prices in a chart.
Usually a 20 day moving average is used as depicted in the chart below.
When the price touches the upper band, the stock is considered overbought and one would expect the price to decline. When it touches the lower band it is considered oversold and one would expect the price to rise.
Bollinger Bands work best on stocks that are trading in a range similar to channels, rather that stocks that are trending up or down.
Another very useful application of Bollinger Bands is when the bands are expanding, the volatility is usually increasing. When the bands are contracting, the volatility is decreasing. Understanding how to identify stocks with a low and high volatility can improve the profitability of certain trading strategies.
Ricky Schmidt
February 27, 2007
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