Bollinger Band

What is Bollinger Band?

Bollinger Bands, one of the most popular indicators, is an envelop around stock price
indicating price range of the stock based on stock volatility. When price moves towards
upper band it is often considered as overbought and when it is near lower range it is
considered as oversold.

Who created Bollinger Band ? John Bollinger a noted technical analyst invented
Bollinger Bands. His finding was influenced by J.M. Hurst's who came with notion of
trading envelop around stocks.

What are the components of Bollinger band? Bollinger band has three important
dynamic lines
1. Middle Bollinger Band - This is a plot of 20 period simple moving average.
2. Lower Bollinger Band - Middle band - 2 * 20 period standard Deviation.
3. Upper Bollinger Band - Middle band + 2 * 20 period standard Deviation.
Concept of Bollinger BandBollinger Band indicates volatility around price of a
stock. When price reaches upper band it is considered as overbought and
could be a good exit point and when stock approaches lower band it is
considered as good entry point.

These are highs/lows or support and resistance. When stock has high price
fluctuation the band expands and when volatility is low they contract to adjust
with change in price volatility.

In normal distribution, 68% of the time price should be within one standard
deviation and 95% of the time it should be within two standard deviation.
Usages of Bollinger Banda. They provide excellent support and resistance
in sideways market . To identify sideways market look for stocks where 50/100
DMA is flat (parallel to date axis).

b. They can be used for to determine trend reversal. When stock breaks upper
band and stay above it for few trading sessions then it is considered to be bullish
and when stock breaks lower band and stays below for some trading sessions
bearish signal is generated.

c. In strong bullish cycle when stock is moving along with upper band and then
moves towards middle band it can be considered as bullish trend reversal. In the
same way when stock is moving lower band and then moves towards middle
bearish trend reversal can be detected.

d. They gives very good idea of volatility of the stock. The wider the band the more
volatility it has.

e. A very narrowing band means indecision on price movement and a possible

break out is imminent.
Limitation
a. They alone do not provide absolute buy and sell signal.

b. In strong trending market, Bollinger bands looses its significance. They tend to give
many wrong signals. Its best to avoid they in such situations.

c. In actual scenario, Price break above Bollinger band is far more than 95% (as per
normal distribution) and not all break gives signal of trend reversals.

d. They often need support of another technical indicator to determine action.

Color Convention of Bollinger Band

1. Dashed grey lines which represents bollinger band.

2. Black lines represent price.