The Bollinger band is an indicator which has been developed by John Bollinger
, a veteran market technician. It is used in day trading in assessing a securitys relative price over a period of time and rate at which its price is changing. A securitys volatility is what is generally identified when day traders speak about the speed at which a securitys cost is moving up or down.
The three parts of a Bollinger band are the middle, lower and upper bands. The middle band is usually a simple moving average. The middle bands standard deviation plus two would be the upper band and the middle bands standard deviation minus 2 would be the lower band. See a sample chart of a Bollinger band in order to better appreciate this.
A day trader may use the Bollinger band in three ways. 1st of all, the Bollinger band could be used to see whether a stock is excessively purchased or overly sold. It happens to be, on the other hand, oversold if it has pushed through the lower band. It is almost always a great verdict if a day trader chooses to buy a stock that has hit the lower band since this enables him to take advantage of the stocks value at a time it is oversold.
2nd of all, the Bollinger band may also be used to ascertain the strength of a trend in day trading. A stock that's bouncing off the middle along with its tips continuously touching the upper band illustrates a strong upward trend. On the other hand, in the event the stock tends to have tips that are continuously touching the middle band and lows coming in contact with the lower band, the downhill trend is regarded as strong.
The Bollinger bands third function is to help a day trader identify reversal signals like the double top and double bottom signals. In the event that a stocks 1st top reaching the upper band is followed by a next top which is not coming in contact with the upper band, it is regarded as a double top sell signal. The double bottom buy signal occurs whenever a stocks recent low touches the lower band and accompanied by another low that doesn't touch the lower band. View sample charts with a Bollinger band at a day trading blog.