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Glossary Term: BOLLINGER BANDS

Definition(s) for BOLLINGER BANDS:


1. ) A method used by technical analysts, who rely on studying the historical trading patterns of securities to predict their future movements. Bollinger bands are fixed lines above and below a security's average price. As volatility increases, the bands widen.

2. ) Similar to Moving Average Envelopes, Bollinger Bands are plotted at 2 standard deviations above and below a 20-day exponential moving average. As standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods. As a rule, prices are considered to be overextended on the upside ('overbought') when they touch the upper band. They are considered overextended on the downside ('oversold') when they touch the lower band. Using two standard deviations ensures that 950f the price data will fall between the two trading bands. The simplest way to use Bollinger Bands is to use the upper and lower bands as price targets. In other words, if prices bounce off the lower band and cross above the 20 day average, then the upper band becomes the upper price target. A crossing below the 20 day average would identify the lower band as the downside target. In a strong uptrend, prices will usually fluctuate between the upper band and the 20 day average. In that case, a crossing below the 20 day average warns of a trend reversal to the downside. As Bollinger Bands creator John Bollinger noted - a move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.



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