The Strongest Trading Signal _ Bollinger Bands Squeeze & Head fake Signal

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Description: Bollinger Bands shows the levels of different highs and lows that a security price has reached in a particular duration and also its relative strength, where highs are near to the upper line and lows are near to lower line. In other words, the price points near the edges of the ‘envelope’ formed can help us recognise a pattern at a particular moment. The bandwidth widens and narrows depending on volatility. If it’s high, the band would widen and if the volatility decreases, then the band would narrow. These bands show oversold and overbought conditions in relation to a selected time period moving average.

Bollinger Bands are somewhat like moving average envelopes, but drawing calculations for both is different. In Bollinger Bands, standard deviation levels are considered to draw the upper and lower lines, whereas for Moving Average Envelopes, the lines are plotted by taking a fixed percentage.

Calculation: For calculation of Bollinger Bands, the following variables are required:

a) Time Period denoted -- ‘N’

b) Standard Deviation value -- ‘s’

c) Three Bollinger bands or lines where:

1. Moving Average Line or Middle Band for ‘N’ period MA (N). Refer average ‘Moving Average’ concept for calculation

2. Upper Band or line wherein MA line is shifted up by price standard deviation for ‘N’ period multiplied by SD measure value ‘D’ (MA + D(s))

3. Lower Band or line where in MA line is shifted below by price standard deviation for ‘N’ period multiplied by SD measure value ‘D’ (MA – D(s))

For different securities, different variable settings can be chosen. Typically traders use 20-day simple moving average with a standard deviation of 2. Some traders may use exponential moving average too.

Example: Taking normal parameters used for drawing Bollinger Bands, we choose:

• Security: Nifty 50

• Data set: Daily close value

• Moving Average: 20-Day simple moving average

• Standard Deviation measure value (D): 2

• Standard Deviation for price calculated for 20-day period

• Filled Range

• Here the green line is the upper band, showing standard deviation above the moving average, which is a 20-day simple MA + (20-Day SD of price x 2)

• The blue line is middle band showing 20-day simple MA

• The red line is lower band showing standard deviation below moving average, which is the 20-day simple MA + (20-Day SD of price x 2)
http://economictimes.indiatimes.com/markets/technical-charts

The band was widest when Nifty50 was volatile during July, the band narrowed when Nifty50 was consolidating during September.

Some important points for interpretation of Bollinger Bands:

• When bands are contracting, there are chances of sharp price changes as volatility is drops

• When price line surpasses the bands’ range, that a strong signal of continuation of the current trend

• When new highs and lows are made outside the bands followed by highs and lows made inside the bands, it shows an imminent trend reversal

• If a move originating in one band tends to replicate on the other band too, it is useful in deciding future price targets

• When the price moves near the upper band, that shows an overbought market, and when the prices are nearer to the lower band, that signals an oversold market

• M-patterns is one of the signal created by Arthur Merrill as an extension to Bollinger Bands to identify M-Tops, which shows signs of confirmation when prices are making new highs

• W-Bottoms, again Arthur Merrill’s work to identify W-Bottoms to determine the strength when prices are making new lows

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Видео The Strongest Trading Signal _ Bollinger Bands Squeeze & Head fake Signal канала Bharat Jhunjhunwala