In previous articles, I have introduced certain charting patterns to you such as the wedge, channels, and the head and shoulders. These technical patterns greatly enhance our probability of success. In today’s article, I am going to be introducing the first technical study that can help you predict where the price of a stock is heading. This study is known as the Bollinger Bands study, and yes they do make stocks dance!
Bollinger Bands were created by a famous technical trader, John Bollinger, in the 1980s. It is a method for traders to identify extreme short-term prices in stocks. Bollinger Bands consist of a center line and two price channels (bands) above and below it. The center line is an exponential moving average and the price channels are the standard deviations of the stock being studied
Standard Deviation is a common measure of volatility. Traders will find that almost always the price of a stock will fall between the bands. The bands will expand and contract as the price of the stock being studied becomes more/less volatile.
When a stock’s price gets closer to touching or crossing the upper band it is said to be overbought and we can expect contraction in the short-term. Conversely, when the stock’s price gets closer to touching or crossing the lower band, it is said to be oversold and we can expect a rise in the stock’s price.
How to add the bands to your charts
You should be able to easily add the bands with whatever trading platform you are using. There should be an option to add a study and the Bollinger Bands will be on that list. From there you can color coat them how you like to keep track. Let’s look at how you would add them on Schwab’s Streetsmart Edge so you have a better idea of where to locate them.
Studies>View All Studies
Just like any other tool you use, the Bollinger Bands are only meant to supplement your research in a trade. Just because a stock has crossed one of the bands it does not GUARANTEE that it will reverse direction in price.
Homework: Go on your trading platform and find out how to add the Bollinger Band study to your charts. If you have any problems doing so please comment below and I would be happy to help you out.