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Bollinger Bands

Bollinger Bands are a type of envelope (or trading band) plotted at standard deviation levels above and below a moving average. Plus or minus two standard deviations where the standard deviations are calculated historically in a moving window estimation. Hence, the bands will widen if the most recent data is more volatile. If the prices break out of the band, this is considered a significant move.

Because standard deviation measures volatility, the bands widen during volatile markets and contract during calmer periods.

Additional Comments:

Mr. Bollinger notes the following characteristics of Bollinger Bands:

- Sharp price changes tend to occur after the bands tighten, after 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.

- Bollinger Bands are displayed in two bands which are plotted at standard deviation levels above or below a moving average.

- Bollinger Bands provide a view of the current trading range. They can be used with other indicators to determine when it's time to buy or sell.

Related Terms:

Upper Indicators
Choose from several popular technical indicators. The indicators are: - Bollinger Bands - Parabolic SAR - MA ...

Historic Volatility
Calculated by using the standard deviation of underlying asset price changes from close-to-close of trading going ...

Fibonacci Retracement
Where prices on a chart move off their latest tops or bottoms in swings of 38.2%, ...

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