Bollinger Bands

Bollinger bands are used by stock traders to determine overbought and oversold levels in the markets. Bollinger bands consist of two trading bands moving above and below a moving average. When using these bands you will see a center line which is either the exponential moving average or the simple moving average (depends upon personal preference), and two bands (price channels) that are the standard deviations of the stock that is being analyzed. Basically, when stock prices touch the upper Bollinger band repeatedly, then the prices are considered to be overbought. Conversely, when these lines touch the lower band repeatedly, stock prices are considered to be oversold.

Technical analysts use the moving average by drawing upper resistance and lower support lines to help them anticipate the price direction of a stock. They will also draw straight lines to connect tops or bottoms so that they can identify upper and lower price extremes. They also add parallel lines in order to identify the channel in which prices should be restricted to or contained within. The stock trader can be pretty confident that their stock prices are moving as they anticipate, as long as the prices do not move out of this channel that they have created using these two lines.

Bollinger bands are used in order to assign the upper and lower bands as price targets. Again, many traders will use these bands in order to determine overbought or oversold areas and will sell when the price touches the upper Bollinger band and will buy when it hits the lower Bollinger band.

Bollinger bands measure price volatility through a mathematical formula using standard deviation. This shows how the price varies from its true value enabling traders to figure out almost all of the price data that is needed between the two bands. This is a very basic explanation of Bollinger bands however it should give you the general basis for why they are used and what they are. 

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock market charts when trading stock. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns. Combine these with your favorite technical indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds.