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How Bollinger Bands (and Stochastics) can help

How Bollinger Bands (and Stochastics) helped guide the market in 2018

I plan to write this article over the weekend, when I was browsing the charts and noticed that the S&P 500 index has been rebounding between its upper and lower Bollinger bands since February. So this is the chart, and I have annotated it to identify some key turning points (you can click on the chart for a larger version):

Bollinger Bands and Stochastics are some of my favorite indicators-if I see a chart without these indicators, I will feel a bit lost.

Bollinger Bands are based on a moving average (aka the middle band) and two lines-one drawn above the middle band and the other below. The other two lines are drawn some standard deviation away from the middle band (line). The typical setting is a 20-day moving average and 2 standard deviations.

One use of Bollinger Bands is to tell you that the stock (or whatever is being drawn) is in relatively Basis of valuation.If the moving average (middle band) is “fair value” (it *Yes* After all, the average price is (relatively) expensive in or near the upper band, and (relatively) cheap in or near the lower band.

band *were able* It also plays a role of support and resistance. If these lines are basically flat, the situation is more common. If & when the upper band starts to tilt, this may be a sign of opening, allowing prices to continue to rise. AKA, walk on the Bollinger Band. The situation in the low frequency band is just the opposite.

Stochastic is an overbought/oversold oscillator. Values ​​above 80 are considered overbought, and values ​​below 20 are considered oversold. Please note that if something is in a trend state (as opposed to range limits-you can use indicators such as ADX to determine the trend), overbought or oversold may remain in this state for a long time. So you can’t blindly use overbought as a signal to sell-also use oversold as a signal to buy.

Combining these indicators may be very enlightening. The Standard & Poor’s chart shows a strong upward movement from the end of 2107 to January 2018. It fell sharply. It is so hard that it causes the lower band to tumble and tilt downward sharply. Note that when the Stochastic indicator reaches oversold, it eventually rebounds. (Also note The value of my favorite oversold indicator at the time-the percentage of stocks above the 50-day moving average at the time gave a strong sell signal.)

From there you can see all the areas I have circled and their correspondence with turning points. Reaching or approaching the upper band (especially the flat ish line) and random overbought is a good warning sign. You may not want to sell directly, but maybe you can use these barriers as signals to tighten your stop loss, get some profits, hedge, etc.

For lower swing exposure and oversold stochastic levels, the situation is just the opposite.

I would like to know what the current situation is. Late last week, the upper limit was basically flat and the S&P index showed no trend, which allowed me to tighten my stop loss and take a profit. Now the upper belt is rising. This makes me more optimistic about whether the market can push higher without first experiencing a correction or consolidation period.

As I have always said, there is no magic indicator or indicator set, but these have been very helpful to me over the years. Of course, you can use SwingTradeBot to scan various Bollinger bands and stochastic indicators. (see Bollinger Band Scan & This Random scan) You can also mix them by Combined scan.

PS If you want to know more about Bollinger Bands I recommend John Bollinger’s book.It is listed in my recommended trading book page.

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