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Bollinger Bands

The Bollinger Bands (BB) were developed by John Bollinger and attempt to keep price movements within measured parameters. BBs are generally plotted at two standard deviations above and below a 20-day simple moving average. With standard deviation being a measure of volatility, the bands will constantly change and are self-adjusting. They will tend to widen during volatile markets and contract during calmer/less volatile periods.



By using two standard deviations to determine the bands, means that 95 per cent of the companies price data falls between the two trading bands. In application, shares are considered overbought when the share price touches the upper band. They are considered oversold when the share price touches the lower band.

Looking at the 20-day exponential moving average line, a crossing below the 20-day average would identify the lower band as the downside target. In a strong uptrend, prices will tend to fluctuate between the upper band and the 20-day average. In this instance, a crossing below the 20-day average indicates a possible trend reversal and a leaning to the downside

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