Introduction and Definition

Bollinger Bands are bands drawn in and around the price structure on a chart. 

Their purpose is to provide relative definitions of high and low: 

- prices near the upper band are high

- prices near the lower band are low 

 

The base of the bands is a moving average that is descriptive of the intermediate-term trend.

This average is known as the middle band and its default length is 20 periods.

The width of the bands is determined by a measure of volatility called standard deviation.

The data for the volatility calculation is the same data that was used for the moving average.

The upper and lower bands are drawn at a default distance of two standard deviations from the average. 

 

Upper band = middle band + 2 std dev

Middle band = 20-period MA

Lower band = middle band - 2 std dev

 

Let's learn how to use them. 

 

The purpose is to help you avoid many of the common traps investors get caught in, including the buy-low trap where the investor buys only to watch the stock continue downward, or the sell-high trap, where the investor sells only to watch the stock continue upward.

Here, the traditional, emotional approach to the markets is replaced with a relative framework within which prices can be evaluated in a rigorous manner leading to a series of rational investment decisions without reference to absolute truths.

We may buy low, or sell high, but if we do so, we will do so only in a relative sense.

References to absolutes will be minimized.

The definition of high will be set as the upper trading band.

The definition of low will be set as the lower trading band.

In addition, there will be a number of suggestions to help you tune this framework to your individual preferences and adjust it to reflect your personal risk-reward criteria. 

 

 

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