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Bollinger bands. What are Bollinger Bands? Bollinger Bands Calculation Before we go into the numbers, remember we've already done the hard work for you.
Bollinger Bands consist of 3 simple calculations: 1 The first or middle Bollinger Band is a moving average of the closing price. For example, to calculate a 20 period moving average you add up the closing prices of an instrument for 20 consecutive days and divide that value by The Bollinger Squeeze When the bands squeeze together, it usually means that a breakout is imminent.
If the candles start to break out of the top band, then the move will usually continue to rise. If the candles start to break out below the lower band, then the price will usually continue to fall. This strategy is designed for you to catch a move as early as possible.
The Bollinger Bounce This strategy is for those of us that like to ask for very little from the markets. Essentially, you wait for the market to bounce off the bands back to the middle of the bands.
Just because people say that Bollinger Bands are great when combined with RSI doesn't mean you should accept it as an absolute truth, go run your tests first! The main change is that they apply this bollinger bands on a 5 minute candlestick chart each candle is worth 5 minutes of trading data. Then they proceed to trade on Bollinger Bands when the market is trading in Range flat and use the upper band as a sell signal and the lower band as a buy signal. Remember, always test other people's strategies in a demo trading platform before taking any risks so you're sure that it actually works for you!
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Australian Securities and Investments Commission. National Bank of the Republic of Belarus. Note We recommend that you read Using Financial Formulas before proceeding any further. Using Financial Formulas provides a detailed explanation on how to use formulas, and also explains the various options available to you when applying a formula. Figure 1: A price indicator, day moving average, and Bollinger Bands.
Applying a Bollinger Bands Formula All formulas are calculated using the FormulaFinancial method, which accepts the following arguments: a formula name; input value s ; output value s , and parameter s that are specific to the type of formula being applied. The price can be one of the following: Hi, Low, Open or Close price. The most used price is Close by default the fourth Y value for a stock chart.
Value 2: The lower Bollinger Band. Example This example demonstrates how to calculate a 20 day Bollinger Band. DataManipulator ' Calculate a 20 day simple moving average. Signals based on the distance between the upper and lower band, including the popular Bollinger Band Squeeze, are identified using the related Bollinger BandWidth indicator.
Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because the standard deviation formula also uses a simple moving average.
The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band. Click here to download this spreadsheet example. Settings can be adjusted to suit the characteristics of particular securities or trading styles.
Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Changing the number of periods for the moving average also affects the number of periods used to calculate the standard deviation. Therefore, only small adjustments are required for the standard deviation multiplier. An increase in the moving average period would automatically increase the number of periods used to calculate the standard deviation and would also warrant an increase in the standard deviation multiplier.
With a day SMA and day standard deviation, the standard deviation multiplier is set at 2. Bollinger suggests increasing the standard deviation multiplier to 2. Bollinger Bands are often used to identify M-Tops and W-Bottoms or to determine the strength of the trend. W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape.
Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms, which form in a downtrends and contain two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band. Second, there is a bounce towards the middle band. Third, there is a new price low in the security.
This low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break. First, the stock formed a reaction low in January black arrow and broke below the lower band. Second, there was a bounce back above the middle band.
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