Bollinger bands were created in the 1980s by John Bollinger. John Bollinger was a long time market technician and analyst. Bollinger bands find the moving average by using a trading band above and below it.
A Bollinger bands indicator is found by using standard deviation, which is the mathematical formula for finding volatility.
This is very useful, as Bollinger Bands adjust themselves to the market conditions as the market progresses and as such, allow market participants who are monitoring the underlying instruments that ability to predicate overbought and oversold positions.
If you have never heard of Bollinger Bands, you may be asking “what are Bollinger bands?”
This is certainly the case for most every new technical chartist. Bollinger Bands are made up of a central line, which is between two price bands. The central line is the moving average, and the price bands are standard deviations of an underlying instrument.
The price bands will contract and expand as market value changes. When using Bollinger bands, traders look to see when the underlying instrument prices touch the upper or lower band or even penetrate the bands, providing overbought and oversold indications.
The lower band is very important as this is the buy signal, as this is the lowest price, and the underlying instrument could be oversold at this time.
The upper band is touched when the underlying instrument is being overbought and is the sell signal. Bollinger bands are also used to track if a underlying instrument is going to continue following a trend. Tracking is simple as you just need to make to parallel lines on a underlying instrument chart.
As long as the prices stay within these lines, you can be pretty sure that the underlying instrument is going to continue the trend.
There a many benefits of Bollinger Bands, with the most important being that Bollinger bands adjust themselves to the market. This is important as many other trading indicators are set to the market when they are first calculated.
The second major benefit of Bollinger Bands is that traders can use them for both short term and long term trading.
As the bands move as more information becomes available, the central line changes to reflect the market and starts displaying the trend that is developing at that time.
The last major benefit of Bollinger Bands is that traders can easily find the price data with the two bands. As Bollinger Bands chart both the highest and lowest values on the same graph, you can quickly note where the underlying instrument is going and what is the highest and lowest value of the day was.
There are many traders that use Bollinger Bands as there many market indicators, as they can quickly find the data that they are looking for. Unlike other indicator graphs, Bollinger Bands have both the high and low values and have a central line to find the average moving value with ease.