DETAILED STUDY ON BOLLIGER BANDS
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Bollinger Bands developed by John Bollinger in 1980s is a technical trading instrument. Bollinger Bands is a versatile tool combining moving averages and standard deviation and is one of the most popular technical analysis tool applied in all financial markets.
Bollinger Bands are like moving Average envelops drawing calculations for both are different. In Bollinger Bands standard deviation levels are considered to draw upper and lower lines, whereas for moving averages envelopes, the lines are plotted by taking a fixed percentage.
Bollinger Bands shows the levels of different highs and lows that a security price has reached
in a particular duration and also its relative strength, where highs are near to the upper line and lows are near to lower line.
The Bandwidth widens and narrows depending on volatility, if its high the band would widen and if the volatility decreases the band would narrow. These bands show overbought and oversold conditions in relation to a selected time period moving average.
COMPONENTS OF BOLLINGER BANDS
Moving Average- 20 period SMA
Upper band – Upper band is 2 standard deviations above the moving average.
Lower band – Lower band is usually 2 standard deviations below the moving average.
Calculations of Bollinger Bands- variables required as follows
Time period denotes-‘N’
Standard deviation value – ‘S’
Three Bollinger Bands or lines.
Bollinger Bands reflect direction with the 20 period SMA and volatility with upper/lower band. According to Bollinger the bands should contain 88-89% of price action, which makes a move outside the bands significant. Bollinger Bands are not meant to be used as a standalone tool. Traders should combine Bollinger Bands with basic trend analysis and other indicators. Bollinger Bands adapt to volatility and these are useful to option traders specially volatility traders.
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