What is this Bollinger Band in TA?

Question

What are the data required to prepare this chart and what type of analysis can we derive?

Answer 1

Before you use any indicator, you should try to get the book or material from the author to determine the exact method before trying the differing opinions.

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a security's price action.

Bollinger recommends using a 20-day simple moving average for the center band and 2 standard deviations for the outer bands. The length of the moving average and number of deviations can be adjusted to better suit individual preferences and specific characteristics of a security.

Trial and error is one method to determine an appropriate moving average length. A simple visual assessment can be used to determine the appropriate number of periods. Bollinger Bands should encompass the majority of price action, but not all. After sharp moves, penetration of the bands is normal. If prices appear to penetrate the outer bands too often, then a longer moving average may be required. If prices rarely touch the outer bands, then a shorter moving average may be required.

A more exact method to determine moving average length is by matching it with a reaction low after a bottom. For a bottom to form and a downtrend to reverse, a security needs to form a low that is higher than the previous low. Properly set Bollinger Bands should hold support established by the second (higher) low. If the second low penetrates the lower band, then the moving average is too short. If the second low remains above the lower band, then the moving average is too long. The same logic can be applied to peaks and reaction rallies. The upper band should mark resistance for the first reaction rally after a peak.

Sharp price changes can occur after the bands have tightened and volatility is low. In this instance, Bollinger Bands do not give any hint as to the future direction of prices. Direction must be determined using other indicators and aspects of technical analysis. Many securities go through periods of high volatility followed by periods of low volatility. Using Bollinger Bands, these periods can be easily identified with a visual assessment. Tight bands indicate low volatility and wide bands indicate high volatility. Volatility can be important for options players because options prices will be cheaper when volatility is low.

I've watched this indicator for years, because in theory and in hindsight, it appears very useful. But in practice, it only distracts me from more important underpinnings.

You can only keep track of two or three things at a time, and this indicator has two or three things within itself that are going on.

Maybe you can find some combination with something else that you find useful.

Answer 2

Its another technical analysis tool that uses three lines --- the upper line, lower line and the simple moving average (sma). plot the upper and lower bands two standard deviations away from the simple moving average. the more closer the stock price is to the upper band the more over bought the stock is. the closer the stock price moves to the lower band the more over sold the stock is. The bolinger band chart shows blue for lower, green for average and red for upper.