Bollinger Band

Extracted from http://www.forex-central.net/bollinger-bands.php

Using the Bollinger bands

- Identifying a change in the trend
Price changes tend to occur after a tightening of the bands.

- Measuring the strength of a trend
The greater the spread between the lower and upper bands, the stronger the trend. Prices that go beyond the bands are a strong signal that the trend will continue.

- Playing on bounces between bands
The bands can be used as support and resistance levels. After having touched a band, prices have a tendency to want to touch the opposite band. This technique can be very useful in a market with no clear tendency or when the bands are parallel.

Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a security. The bands were designed to augment other analysis techniques and indicators. By themselves, Bollinger Bands serve two primary functions:

* To identify periods of high and low volatility.
* To identify periods when prices are at extreme, and possibly unsustainable, levels.

As stated above, securities can fluctuate between periods of high volatility and low volatility. Being able to identify a period of low volatility can serve as an alert to monitor the price action of a security. Other aspects of technical analysis, such as momentum, moving averages and retracements, can then be employed to help determine the direction of the potential breakout.

Remember that buy and sell signals are not given when prices reach the upper or lower bands. Such levels merely indicate that prices are high or low on a relative basis. A security can become overbought or oversold for an extended period of time. Knowing whether or not prices are high or low on a relative basis can enhance our interpretation of other indicators, and it can assist with timing issues in trading.