Bollinger Bands and Its Importance

Introduction to Bollinger Bands:

1) Bollinger Bands were developed by John Bollinger. They are a set of bands that are plotted at 2 standard deviations above and below an exponential moving average (20-day is widely used) and are displayed over a stock's price chart. 

2) Using 2 standard deviations guarantees 95% of the price data will lay between the bands.

3) Because of the tendency for a stock to stay within the bands, prices are considered overbought when they reach the upper band and oversold when they reach the lower band.

Seven Rules for Bollinger Bands given by Sanjay Ved sir himself:

1) The bands tend to converge towards the mean when prices are confined to a very narrow range.

2) When volatility increases, the band tend to expand in opposite direction (one can initiate position in the direction of the breakout).

3) The first move outside the band is a sign of the beginning of a new trend (generally).

4) The move outside the band, followed by the move within the band is a sign of a breather and not an end of the trend.

5) The median line may act as a support in downtrend, and resistance in an uptrend.

6) Tops/Bottoms made outside the band, followed by Tops/Bottoms made within the band will signal a change in trend.

7) Move starting from one end of the band will usually touch the other side of the band (in consolidation).

So, Bollinger offers the following characteristics:

• Expect sharp prices changes after volatility lessens and the bands narrow. 

• When a stock moves outside the bands, expect the trend to continue.

• A reversal usually occurs after a bottom or top is made outside the bands and then the underlying issue moves back inside the bands.

• Prices tend to move from one band to the other, so this can aid in projecting price targets

Graphical representation can be made in paper---looks good :

Exampe 1: To show buy at bottom- sell at top of the band. Just draw a dummy figure.

Here is a typical set of Bollinger Bands with VECO. You can see how the stock spends most of its time within the bands and the general tendency to move back and forth between the bands. Used in conjuction with other indicators for confirmation, buying at the bottom band and selling at the top would provide consistent profits. 

Example 2: To show what happens when bands narrow ?

This XICO chart demonstrates two Bolliger Band principals. First is the tendency for a stock to experience a big move after the bands have narrowed. You can see this in late June. Second, when the stock moved outside the top band, although the stock did pull back, and took support at median line, the uptrend continued.