Learn The Stock Market And How to Trade

Bollinger Bands, invented by John Bollinger, are a simple moving average (often 20 period moving average) with a plus 2 standard deviation (the standard deviation is calculated using the same prices as the moving average) and a -2 standard deviation.

Standard Deviation Calculation

Some general notes and uses about trading bollinger bands:

• Bollinger Bands use of 20 period moving average and +/- 2 standard deviation should be adjusted and/or optimized for the style of trading or investing you are doing.
• Just because 2 standard deviation is generally assumed to mean 95% of the time a stock will fall between these two areas.  Remember this assumes a normal curve and a sufficient sample size, neither of which you have with this tool.  Don’t factor a 95% success rate with this tool.
• The price tends to rise on the upper bollinger band and falls down the lower band.
• If the price closes outside of the band this is generally a sign of a price continuation not a reversal.  Volume indicators is a good tool to verify with this.
• Remember Bollinger Bands factor volatility and trend, so if you use confirmation signals it needs to not be correlated with either volatility nor trend.

Remember you have to learn to make the tools work in your strategy to make money, not make the tool your strategy.

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Related posts:

1. Relative Strength Index
2. Stock Beta
3. Trading Stock Market – Ups and Downs
4. Moving Averages
5. Patterns in Charts – Double Bottoms