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Bollinger Band In A Nutshell
When using the Bollinger Band it would be safe to say that adding a momentum indicator could certainly help to sharpen your predictions about the market. For example, if you are using a Stochastic and it is above 80 while the chart is nearing the top of the Bollinger Band, you can have a decent opinion that the market may be becoming over bought. Same can be said for the reverse if the Stochastic is below 20 and the chart is nearing the bottom Bollinger Band.
Taking a look at this charting tool, it allows the trader to see when a stock is in the upper part of its trading range or the lower. The Bollinger Band was created by John Bollinger, and it uses the simple moving average, and plots two standard deviations away from the average. Many traders and investors use the Bollinger Band to determine if a stock or other trading product is becoming over bought and over sold. Using standard deviation, we can assume that there is an above 90% chance that a given data point stays within two standard deviations.
Closer Look at Bollinger Band
As with any charting tool, they are never 100% and should be tested on a demo account before being used. With the Bollinger Band tool, many of the charting platforms will let you change the parameters of the tool to fit your investing and trading style. Another way to use it is with fundamental data, as that can give you an indication of where price may want to go. If the price of a stock is expensive fundamentally, and you see that price is nearing the top of the Bollinger Band, then that could indicate a potential selling opportunity. Either way you decide to use the tool, this has been used by many and continues to be used today. Again, test it on a demo account before transitioning over to a live account to ensure you fully understand how it works.
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