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Type of Indicators in Technical Analysis – The Bollinger Bands

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The Bollinger Bands is a technical indicator proclaimed by some traders to have played a key part in successful trading strategies.

Similar to the Average True Range (ATR), the Bollinger Bands also measures the volatility of the market and is not used as a Leading Indicator or Trend Reversal Indicator.

The Bollinger bands are indicated with three (3) bands on the chart – the upper band, the middle band and the lower band.

  • The upper band is the middle band + 2 standard deviations.
  • The middle band is the 20-period Simple Moving Average (20-SMA).
  • The lower band is the middle band – 2 standard deviations.

The illustration above shows a typical chart with Bollinger bands in place. The concept of interpreting the bands is that if the market is less volatile, the bands will tend to tighten or contract. If the market prices are more volatile, then the bands will expand or widen.

In the above illustration, the bands are shown as ‘squeezed’ at first, indicating that no major price movements or that the prices are not volatile. From the ‘squeezed’ position, the bands are then shown expanding and moving into a ‘breakout’, causing a jump in prices and volatility.

Some traders have also used the Bollinger bands as support and resistance levels for market prices. Thus, the upper band will become the resistance level and the lower band will become the support level.

The chart above shows the Bollinger bands with the upper band being a strong resistance level to the market prices.

Other Indicators in Technical Analysis:

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