Utilizing Bollinger Bands, a quick review of basic knowledge [Tokyo Research Institute]
Hello, this is the staff of Tokyo General Research Institute!
Many people may have used “Bollinger Bands.”
Bollinger Bands were devised by John Bollinger in the 1980s and are a technical indicator that applies statistics.
You may know about them, but let’s review how to use them one more time!
A Quick Review of Bollinger Bands
Bollinger Bands represent the range within which stock prices can move up or down.
The moving average line is at the center, and statistically, the probabilities of price movement within this moving average range are assumed.
The upper and lower lines closest to the moving average are ±1σ
The second-closest lines are ±2σ
The third-closest lines are ±3σ
and these are composed of standard deviations.
In the image below, ±3σ is not displayed, but from the top line, there are five lines: +2σ, +1σ, the moving average line, -1σ, -2σ.
How to Read Bollinger Bands
Bollinger Bands repeatedly contract and expand, and are mainly an effective tool for identifying trend reversal signals.
There are two common investment methods that utilize Bollinger Bands.
They are trend following and contrarian strategies.
＜Trend Following＞
Trend following involves identifying the trend signal and riding the trend to gain profits.
When the chart moves beyond ±2σ and starts to diverge from the previously observed price range, enter, and when the bands start to converge again, exit. It is important to gauge the market momentum.
＜Contrarian＞
Contrarian strategy enters by selling in an rising market or buying in a falling market when the chart breaks through the bands.
In principle, when a chart that has been moving within the bands breaks upward, it is often overbought, and when it breaks downward, it is often oversold, so you enter when you confirm a trend reversal there.
Also, Bollinger Bands have three characteristic bands.
・Squeeze
In a squeeze, the band width tightens, indicating a period of market pause or a preparatory phase for a forthcoming trend formation.
・Expansion
In expansion, the bands widen significantly, indicating a strong trend in the market.
・Band Walk
Band Walk refers to a chart forming along the ±2σ line within expansion, observed when a strong trend is occurring.
Notes on Bollinger Bands
The range shown by Bollinger Bands is probabilistic, so trading by blindly trusting the bands can be dangerous.
During a squeeze, the market tends to remain unsettled, so be mindful of that when trading.
Conclusion
Bollinger Bands are used as one of the technical indicators for trading not only stocks or FX but various financial instruments.
Review them and invest based on statistics.
Also, our company handles a tool called Montana Band as well.
It is another one of the same technical indicators as Bollinger Bands.
See below for how to read it
A new service has started: a newsletter delivery!
Our company’s representative will share insights on market views and thinking based on technical analysis.
From time to time, some paid content is made available for free, so please do register.
We also deliver the representative’s daily trading and market information via LINE@.
Save the image below,Add us on LINEas a friend by scanning theQR codeand simply select the image from your album to register easily!
If you are adding via the friend search, go from here →【@billiontouch】
