Bollinger Bands
This is one of my favorite technical indicators. Bollinger Band is a volatility indicator and was invented in the 1980s by John Bollinger. The band is plotted two standard deviations away from the middle line which is the moving average of the price. When the markets become more volatile, the bands widen and moves away from the average, and during less volatile periods, the bands contract and move closer to the average. The tightening of the bands is a good early indication that the volatility is about to increase sharply.
BBs alone are not really a trade signal, you have to combine it with other indicators, but they can become quite useful in spotting breakouts and to look for oversold or overbought securities. Look at the charts below. You can see that before any major move in the market the band start to pinch and come together before breaking out in a direction. You can also see that the price stayed relatively inside the BBs. Hence, one of the few ways to trade the market is to bet against the market when the price is overextended outside the BBs. However, you have to be nimble. Just because it is overextended, doesn't mean it will turn sharply in the other direction. Although there are a few occasions. One other way to tell overbought and oversold period is the price oscillator. Also, note that the moving average which is the middle line acted as support and resistance. You could say that it almost have a magnetic or repulsive quality.
BBs alone are not really a trade signal, you have to combine it with other indicators, but they can become quite useful in spotting breakouts and to look for oversold or overbought securities. Look at the charts below. You can see that before any major move in the market the band start to pinch and come together before breaking out in a direction. You can also see that the price stayed relatively inside the BBs. Hence, one of the few ways to trade the market is to bet against the market when the price is overextended outside the BBs. However, you have to be nimble. Just because it is overextended, doesn't mean it will turn sharply in the other direction. Although there are a few occasions. One other way to tell overbought and oversold period is the price oscillator. Also, note that the moving average which is the middle line acted as support and resistance. You could say that it almost have a magnetic or repulsive quality.