Bollinger Bands are one of the most common volatility indicators used in technical stock market analysis. The bands plot three separate lines on a price chart, with the outer two representing a two-standard deviation range from a center line calculated using a moving average. Because the standard deviations widen or narrow dynamically based on the security's trading range, Bollinger Bands can be a very flexible and adaptable tool.
It is very common to combine Bollinger Bands with another famous indicator, the Relative Strength Index , or RSI, to help confirm a trend's relative strength. The RSI is a momentum indicator that compares the number of days a security closes up versus closing down over a period of time.
These values are then plotted on a range from zero to , with overbought securities typically expected when the RSI returns a value over 70 and oversold securities expected when the value is under When the two are combined, the RSI acts to either support or dispel possible price trends.
He or she could then sell the stock, buy a put or sell covered calls. Suppose instead the price chart shows trading is reaching the lower Bollinger Band and the RSI is not under In this case, the RSI is telling the investor the security may not be oversold as the Bollinger Bands seem to indicate. The trader would not immediately enter buy calls or purchase extra stock since the downtrend could continue.
If the RSI is high enough, the trader may even consider a sell. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.
Become a day trader. Learn more about Bollinger Bands, a tool based on standard deviations of moving average that can be applied to both high Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility Discover the logic behind using Bollinger Bands as a measure of price volatility for a security, and how the bands adapt Learn about John Bollinger and his widely followed indicator, Bollinger Bands. Explore how traders interpret the different Learn how to establish profitable trading strategies using technical trader favorites such as Bollinger Bands and the moving Read about the differences between how Bollinger Bands and moving average envelopes are constructed and what that means for This strategy has become one of the most useful tools for spotlighting extreme short-term price moves.
In the s, John Bollinger developed the technique of using a moving average with two trading bands above and below it. Learn how this indicator works, and how you can apply it to your trading. The Relative Strength Index comes in handy when identifying areas that are potentially overbought or oversold.
Learn to pounce on the opportunity that arises when other traders run and hide. Options traders have to pay attention to more indicators than your average stock trader does, including volatility, direction, and duration.
A technical indicator that combines aspects of candlestick analysis How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded.
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