Bollinger Bands - Utilizing The Bollinger Bands Guide
Bollinger Bands are a technical analysis indicator that saw heavy use around the 1980. The gentleman responsible for the creation of this tool is John Bollinger.
The primary use of Bollinger Bands is to identify overbought and oversold conditions in the forex markets. It is normally used in forex trading but especially in stock trading. Much of the foundation of Bollingers work was based on the research of Hurst, who did research on trade envelopes in 1970.
Bollinger created a dynamic tool unlike Hurst, who worked on a tool that was fixed. He did this by applying a 20 period moving average, on an instrument price along with two deviation bands on either side. It is normally used with other forex indicators such as the stochastic indicator in addition to RSI indicator. The interesting thing about bollinger bands when applied to price is the fact that they tend to act as support and resistance.
Market price will usually fluctuate within both deviation bands. Changes in the trend may occur should price close outside the outer bands. Another fascinating aspect of bollinger bands is how the price in a trending market tends to find support at the middle band, which is the 20 period moving average. In such instances, resistance is usually find at the high or low deviation bands. The above situation where trending price bounces off the middle band and the upper or lower bands is called riding the band. This is a signal that there is a good trend at the moment.
While bollinger bands can be used alone, they are better off being used together with a number of other indicators. Candlestick patterns and price action are two tools that do well with this indicator.
They are not only used in forex trading but also the stock market as well as futures and commodities trading. Bollinger bands are a great tool due that can be applied to many markets.
Article Source: FxTradingStock.com
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by: Rueben Gomez
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Word Count: 328
Date: Wed, 6 Jan 2010
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