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Finance Dictionary and Glossary of Investment Terms
A technical analysis technique in which lines are plotted two standard deviations above and below a moving average, and at the moving average itself. Because standard deviation measures volatility, these bands will be wider during increased volatility and narrower during decreased volatility. Some technical analysts consider a market which approaches the upper band to be overbought, and a market which approaches the lower band to be oversold.
A trading band (upper and lower boundary lines) plotted at standard deviation levels above and below a moving average. Because standard deviation measures volatility, the bands widen during volatile markets and contract during calmer periods. The major assumption that technical analysts make when using Bollinger Bands to trade is that prices tend to stay within the upper and lower band. When a price breaks through a boundary, either above the upper line or below the lower line, it usually signals that the move is strong enough to continue further. When the bands get closer together, it is more likely that there will be a price breakout. You can create the bands using any moving average. Some analysts recommend the 10-day moving average (MA) for short-term trading, the 20-day MA for intermediate trading, and the 50-day MA for long-term trading.When using Bollinger Bands to arrive at buy and sell decisions, it is recommended you confirm potential trades with other indicators and fundamental data.When using Investor charts to study Bollinger Bands, you can select whatever moving average and standard deviation (determines how wide the envelope is) works best for your investing strategy. Check this feature out in Investor''s Stock Research area under the Charts tab on the left bar.