A touch of the upper band by price that was not confirmed by strength in the oscillator was a sell setup and a similarly unconfirmed tag of the lower band was a buy setup. The stock broke support a week later and MACD moved below its signal line. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. The increasing distance between the upper and the lower bands while volatility is growing, suggests of a price developing in a trend which direction correlates with the direction of the Middle line. Corporate clients, click here. MSFT above , you can see the trend reversed to an uptrend in the early part of January, but look how slow it was in showing the trend change. Adjusting for serial correlation is the purpose of moving standard deviations , which use deviations from the moving average , but the possibility remains of high order price autocorrelation not accounted for by simple differencing from the moving average.
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.
How to Use Bollinger Bands
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The Bollinger Bands indicator displays the current market volatility changes, confirms the direction, warns of a possible continuation or break-out of the trend, periods of consolidation, increasing volatility for break-outs as well as pinpoints local highs and lows. Bollinger also describes a separate Band Width Indicator that reflects the width of the Bollinger Bands. Bollinger %b Trading Signals. Bollinger %b can be used in a trending or ranging market. Trending Market. Go long if a retracement records a negative number on %b (i.e. price has closed below the lower Bollinger Band) and is followed by a second retracement where %b remains positive. In Spring , Bollinger introduced three new indicators based on Bollinger Bands. BBImpulse measures price change as a function of the bands; percent bandwidth (%b) normalizes the width of the bands over time; and bandwidth delta quantifies the changing width of the bands.