Knowing the Market price indicators
In investing, there are three vital questions:
. Is this a short-lived rally or a trend?
. Is this actually a trend change?
. Is this price retreat in a rising trend an chance to try the trend, or a signal that the trend is ending?
Technical analysis indicators are generally designed to answer one or more of these questions. The answers assist us to select greater trading opportunities, and to trade them in the correct way. It is no good trading a rally because a major trend change. It calls for various techniques, and we need a rules to draw a conclusion when the rally has ended and the downtrend resumed.
Bollinger Band Basics
Bollinger Bands are accessible on many charting software. They have become popular mostly because they answer a question every investor needs to know:
Are stock prices high or low?
What are Bollinger Bands?
Bollinger Bands are curves drawn in and near the price configuration on a chart that provides a relative definition of high and low. Prices near the upper band are high prices, while prices near the lower band are low.
The base of the bands is a moving average that is descriptive of the intermediate-term trend. This average is known as the middle band, and its default length is 20 periods. The width of the bands is set by a measure of volatility, called standard deviation. The data for the volatility calculation is the same data that were used for the moving average. The upper and lower bands are drawn at a default distance of two standard deviations from the average.
These are the fundamental Bollinger Band formulas :
Upper band = Middle band + 2 standard deviations
Middle band = 20-period moving average
Lower band = Middle band - 2 standard deviations
Learning how to use Bollinger Bands effectively can’t be fully explained in this article. However, the following rules serve as a good beginning point.
10 Main Rules for Using Bollinger Bands:
1. Bollinger Bands supply a relative description of high and low.
2. That relative definition could be used to compare share price action and indicator action to arrive at exact buy and sell decisions.
3. Applicable indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
4. Volatility and trend already have been deployed in the building of Bollinger Bands, so its use for confirmation of price action is not recommended.
5. The indicators applied for confirmation should not be openly related to one another. Two indicators from the same category do not increase confirmation.
6. Price could-and does-walk up the upper Bollinger Band and down the lower Bollinger Band.
7. Closes outside the Bollinger Bands can be continuation signals, not reversal signals-as is displayed by the use of Bollinger Bands in some very successful volatility-breakout systems.
8. Bollinger Bands are based upon a simple moving average. This is because a simple moving average is used in the fundamental deviation calculation.
9. Be careful regarding making statistical assumptions based on the use of the standard deviation calculation in the building of the bands. The sample size in most deployments of Bollinger Bands is too small for statistical significance, and the distributions involved are rarely typical.
10. Finally, tags of the bands are only that, tags, not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.
These methods outline the key guidelines for using Bollinger Bands.
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