Standard Deviations

In this example Microsoft is charted using 20 day Bollinger bands at 2 standard deviations.

Contracting bands warn that the market is about to trend: the bands first converge into a narrow

neck, followed by a sharp price movement. The first breakout is often a false move, preceding a

strong trend in the opposite direction. A contracting range [C] is evident in June 1998: the bands

converge to a width of $2, followed by a breakout in July to a new high.

 

A move that starts at one band normally carries through to the other, in a ranging market. A move

Outside the band indicates that the trend is strong and likely to continue – unless price quickly

Reverses. Note the quick reversal [QR] in early August. A trend that hugs one band signals that

the trend is strong and likely to continue. Wait for divergence on a Momentum Indicator to signal

the end of a trend.

In this example, 20 day Bollinger Bands at 2 standard deviations and 10 day Rate of Change.

1. Go short [S] – bearish divergence on ROC.

2. Contracting Bollinger Bands [C] warn of increased volatility. This begins with a false rally

(note the ROC triple divergence) followed by a sharp fall.

3. Go long [L] – price hugs the lower band, followed by a bullish divergence on ROC.

4. Go short [S] – price hugs the upper band, followed by a bearish divergence on ROC.

 

 

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