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Technical Analysis: Bollinger Bands

Posted By Jim On 05/10/2007 @ 8:21 am In Investing | 2 Comments

What the heck are Bollinger Bands? Created in the 1980s by John Bollinger, they are the plots two standard deviations above the moving average, two standard deviations below the moving average, and the moving average itself. It’s measures volatility because the standard deviations will increase with increased volatility, i.e. the bands will widen. When the moving average isn’t as volatile, the bands will shrink. Below is a chart from Investopedia that charts the bands of one stock and the moving average is for 21 days.


Image from Investopedia [3]

So, how do you read it? As the price moves closer to the upper band, the more the stock is more overbought; as it moves closer to the lower band, the stock is more oversold. Being oversold may indicate a buying opportunity as the price has been depressed, perhaps below its true value; the opposite if it’s overbought. Simplistically, how some people use it is that when the price is below the moving average, they wait until it hits the lower band to buy. When they have the stock and the price is above the moving average, they will wait until the price hits the upper band to sell.

There are a lot of various strategies involving the Bollinger Bands but I think that’s outside the scope of this article, I just wanted to cover the term and the basics so that I knew what people were talking about. Now both of us know what Bollinger Bands are.


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