1. Understanding the Basics and Composition of Bollinger Bands
Bollinger Bands are a simple and practical technical indicator that is familiar to investors in digital currencies and the stock market. They not only help investors analyze market conditions and predict market trends but also assist in identifying buying and selling points in the market. Let’s delve into Bollinger Bands with Little K.
1. Basic Understanding of Bollinger Bands
To excel in using Bollinger Bands to enhance investment skills, investors first need to understand what Bollinger Bands are, their origin, characteristics, specific algorithms, and more.
2. The Origin of Bollinger Bands
Also known as the stock price channel line, Bollinger Bands, or BOLL for short, derive their name from the indicator’s creator, John Bollinger. A stock market analyst, John Bollinger designed this technical indicator based on the standard deviation principle in statistics. It is widely used in investment markets to observe price trends. Bollinger believed that stock price fluctuations revolve around a central value, such as a moving average, and introduced the concept of a “stock price channel.” By calculating and plotting this channel, investors can observe price fluctuations within the channel’s range. The width of the channel varies with the magnitude of price fluctuations. The channel also acts as a regulator for stock prices, automatically readjusting them back into the channel if they deviate too far. Through Bollinger Bands, investors can clearly and intuitively observe price fluctuations and make judgments about future price trends. Consequently, Bollinger Bands have gradually become a popular technical indicator widely used in investment markets.
3. Calculating Bollinger Bands
John Bollinger’s initial design of Bollinger Bands focused on mean reversion. If stock prices are running above the upper band, it indicates overvaluation and a trend towards the mean. Conversely, if stock prices are running below the lower band, it suggests undervaluation and a trend towards the mean. To achieve this, he introduced three lines: the upper band (UP), the middle band (MB), and the lower band (DN), where the middle band represents the N-day moving average. John Bollinger then incorporated the concept of standard deviation from statistics to calculate the upper and lower bands. Just like other technical indicators, the results vary based on the chosen calculation period, such as daily, weekly, monthly, or even minute Bollinger Bands. However, in practice, the most commonly used are the daily and weekly Bollinger Bands. Although their calculation periods differ, the calculation methods are similar. Here’s an example of how to calculate the daily Bollinger Bands: Middle Band = N-day moving average Upper Band = Middle Band + K times N-period standard deviation Lower Band = Middle Band – K times N-period standard deviation Typically, K and N values are 2 and 20, representing a 20-day moving average and 2 times the 20-day standard deviation. Once the calculation formulas are understood, it is unnecessary for ordinary investors to perform the calculations themselves.
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Decoding the Origin and Strategies of Bollinger Bands with Xiao K