What do bollinger bands indicate

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Sharpen Your Trading Skills Indicate Live Education Online Courses Local Workshops. Follow us on Twitter Schwab4Traders. Next question, Trent from Texas; bands is a Bollinger band squeeze?

Lee I know you bands the Bollinger bands up earlier. I don't think we have an example of a squeeze but can you quickly talk through what a Bollinger band squeeze is and how someone might use it? I think to understand what that means let's just review very quickly what the Bollinger band indicator bollinger seeking to tell us. It is trying to give us an idea of volatility. And the way it does that is it has a measure of central tendency which is a moving average of prices.

And then the indicate are set above and below that measure of central tendencies based on a volatility measure which is the standard deviation of price. So if things are volatile of course the spread of prices which makes up the standard deviation calculation are wider, the bands are further apart. If things are not as volatile then of course the standard deviation of price is less and they collapse down. In an extreme case they can collapse down a lot. Now I'm a technical analyst.

We don't indicate much often with fundamental analysts but one thing we do both agree on is that volatility is needed. So what bands means is generally speaking periods of high volatility are followed by periods of low volatility and vice versa. So if you see where the Bollinger bands are really close together it's saying that you indicate in a low volatility situation.

Now the question is of course well, bollinger do I know what that is? Bollinger himself in his book said that look at a chart about six months long. If the bands are bollinger narrow as they've been during that time frame you are actually in a squeeze. So what does that tell you? Think about it like this. You're putting a spring into indicate jack in the box.

Eventually it's going to break. When volatility reverts to the mean. You don't know which direction but you do know that you're setting up for a decisive move. Let's pull up Lee's chart once again on the screen there. Lee, I was overhearing you talking to a client and it was really eye opening to that client where they were talking about some ways to use Bollinger bands that weren't necessarily the right ways to use them.

Are there some common mistakes that clients make when trading Bollinger bands? So the first thing — and I'm going for Mr. Bollinger said is there is bollinger nothing of a touch bands a band which is in of itself a signal to do anything.

Now it could be. So a lot of people they will say, ok, for instance if you can bollinger this in here. We have gone down to the lower Bollinger band. Bollinger, it can be a buy when you hit the lower part of the band if the bands are relatively horizontal. But notice how they started turning down due to the what. So that actually occurs a lot.

That what called walking the band. So here is — that's one mistake that people use just a hint of a band is a signal to do something. And then at the beginning of March we see the same thing. The stock comes out of the bottom band. Now a good way to use Bollinger bands and the way Mr. Bollinger thought was a good idea is you can use them to help you pick tops and bottoms. The way you do that is first you have to decide what are Bollinger bands really telling us.

They're really telling us what our relative highs and relative lows and let me explain that to you. Let's say a bands runs up and makes a high. Now the volatility starts picking up. The stock goes up a little higher marginally.

Is that really a higher high if you consider the effects of volatility? That's what Bollinger bands are trying to tell us. So using that they can bands us clarify tops and bottoms. Here is a perfect example actually in March in Intel. Notice how we went down and made a low. Clearly outside of the lower Bollinger band, right?

Notice the rally and then notice the second low. It is lower than the first one, isn't it? But you notice something else that's inside the lower Bollinger band? So that's telling us actually on a relative basis it is a higher low. You wouldn't normally think about buying a lower low 'cause it looks like the trend is continuing lower. But this is indicate you that it is not a lower low bollinger a relative basis and you can see that wasn't a bad time.

So that actually signaled strength at least in the short run off of that move. Even though it was inside the band instead of outside the band. And of course the opposite side of that trade would be a double top where you make the first high outside of the band.

You pull back off into the moving average. We sometimes call what the middle band. And then you rally up again.

You could what make a higher high but if it's inside bollinger upper band indicate gives you more confidence that that is a top. Please try again in a few minutes. Schwab has tools to help you mentally prepare for trading.