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Indicator Insight:
Bollinger Bands
92
28.0
26.0
25.5
25.0
24.5
24.0
23.5
23.0
21
27
3
10
February
18
24
3
10
March
17
24
31
7
April
Source: MetaStock
40
39
38
37
36
35
34
33
Support point
32
31
30
29
Head fake
Money Flow Index
Bullish readings
greater than 50
80
70
60
50
40
30
Divergence
December
2003
February
March
April
Source: MetaStock
75
92
91
90
Downtrend,
moving average
acts as resistance
89
88
87
86
85
84
83
Uptrend,
moving average
acts as support
82
81
80
79
3
10
February
18
24
3
10
March
17
24
31
7
April
14
78
Source: MetaStock
Key points
Although software programs allow you
to adjust parameters, Bollinger suggests
using the default indicator values a
20-period moving average with bands
set two standard deviations above and
below the average at all times (see
Relatively speaking: John Bollinger,
Active Trader, p. 60). He advises traders
who wish to adjust the indicator to
shorter or longer time frames simply to
use shorter or longer bars (e.g., 60minute bars or weekly bars, etc.).
Using confirming technical tools or
chart patterns is an important element of
using this indicator. Bollinger Bands are
not a tool to be used in isolation. Pick
indicators that compliment the Bollinger
Bands, but do not replicate the same
information. For example, using RSI and
stochastics (another oscillator) along
with Bollinger Bands simply gives you
the same information from the two oscillators. Combine volume, an oscillator
and the Bollinger Bands for a morerounded market perspective.
Bottom line
By providing a framework designed to
contain nearly 90 percent of price fluctuations, Bollinger Bands are a tool for
identifying whether price is relatively
low or high at a given time. They can be
used for setting price targets, identifying
swing points and exhaustion moves, and
pinpointing trend shifts. Probably their
strongest value, though, is the ability to
identify periods when volatility is dropping (reflected by narrowing bands) or
exceptionally low, as this can set the
stage for a good trend.
Like most technical indicators, Bollinger
Bands are not stand-alone tools, and
tags of the bands should not be interpreted as reversal signals without taking
other evidence into account. Confirming
information, such as volume and price
patterns, can be used to determine the
meaning of a Bollinger Band signal.
79