When to buy using Bollinger bands

Fsp Invest, 30 Oct. 2013

Tags: bollinger bands, technical analysis, buy indictor, technical indicator, indicator, sell indicator, investing



If you use technical analysis to buy and sell shares, Bollinger bands are a popular indicator. Essentially this tool uses bands to show price volatility. From that you can make a decision to buy, or sell. Read on to discover when to buy using Bollinger bands…



When you add Bollinger bands to a share price graph you’ll see three moving bands, Gareth Stokes in Fear, Greed and the Stock Market explains...

These are the upper, lower and middle band. And for a charting program to generate this, it uses a number of statistical calculations.

There’s no way to simplify an explanation of this tool. But you need only know that technical analysts use the bands to reflect price volatility.

If you want to know more about the technicalities, the top and bottom band represent two standard deviations above and below a simple moving average.

These bands expand and contract as the volatility in the share price reduces or increases.

You make your buy and sell decisions based on where the share price graph is in relation to the upper and lower band.

If the share price intersects the upper band, the share is overbought. This means the price has run too hard and you should sell.

If it crosses the lower band, the share is oversold and you should consider buying again.

In general, the share price oscillates between the upper and lower bands. This makes sense, considering sellers will enter the market at the top band, and buyers enter the market at the bottom.

The upper and lower Bollinger bands become (in effect) areas of support and resistance.

Technical analysts also use Bollinger bands in conjunction with other technical indicators. That’s the beauty of technical analysis. You can confirm you findings by using a host of other indicators.

The Bollinger band indicates ‘overbought’ and ‘oversold’ positions

In the share price graph below, the Bollinger bands show oversold positions in mid-October, early December and early February 2006. In each of these instances, you could have bought the share and enjoyed a reasonable share price gain.

Source: Share Friend

So there you have it, when to buy using Bollinger bands.


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