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you a brief introduction to Bollinger Bands so here we go
Bollinger Bands were invented by market technician John Bollinger in the 1980s
they are a popular indicator that helps traders to determine possible buy and
sell points as well as when a stock might make a big move soon in order to
understand Bollinger Bands first we need to take a quick look at standard
deviations don't worry it's simple a standard deviation is just a measure of
how far away a stock's price is from its average or typical price
one standard deviation is a little bit higher or lower than the average or
typical stock price and this happens frequently two standard deviations means
a lot higher or lower than the average or typical stock price and this happens
occasionally three standard deviations is a whole lot higher or lower than the
average or typical stock price and this happens rarely but it does happen in a
normal distribution a stock's price will stay within one standard deviation
sixty-eight point two percent of the time alright so if this is the average
price of a stock all right it might go one standard deviation lower or one
standard deviation higher but it'll stay within one standard deviation of the
mean or average about sixty eight point two percent of the time
it will stay within two standard deviations
95.5% at the time all right so here's the mean or average price of the stock
and here's here's if it goes down to standard deviations the stock price and
here's if the stock price goes up to standard deviations and it'll stay
within two standard deviations almost all the time
ninety-five point five percent of the time and the stock's price will stay
within three standard deviations ninety-nine point seven percent of the
time so if this is the average stock price way out here is if it goes down
the stock price goes down three standard deviations and way over here is if it
goes up three standard deviations all right and ninety-nine point seven
percent of the time the stock's price will stay within three
standard deviations so that's what standard deviations mean now this is a
picture of a daily candlestick chart so each one of these candlesticks
represents one day of price action and I made a separate video if you look
through my old videos on how to read candlestick charts so this is a daily
candlestick chart each candlestick represents one day of price action for a
stock now the three blue lines one blue line here's one and here's one the three
blue lines two solid lines and one dotted line in the middle are the three
Bollinger Bands alright so you have your lower band upper band and the mid line
and we're going to talk about that the mid line which is the dotted blue line
is just the 20-day simple moving average that's all it is
so it's just the the average the mean of the last 20 days of price action the
last 20 daily candlesticks so the mid line represents the average
price of the stock or at least the average for the last most recent 20
trading days we talked about how standard deviations
represent how far away the stocks prices from its average or typical price the
upper and lower solid Bollinger Bands show this
the upper Bollinger Band which is the solid blue line on top is two standard
deviations above the average stock price which is represented by the dotted line
alright so this is the 20-day simple moving average we can call that the
average stock price for the last 20 trading days and the upper band here
represents two standard deviations above that price the lower Bollinger Band
which is the solid blue line on the bottom is two standard deviations below
the average stock price which is the dotted line if the stock market were
truly a normal distribution then a stock's price would stay within the
upper and lower Bollinger Bands ninety-five point five percent of the
time because remember it's two standard deviations above and below the mean here
or average but realistically speaking the stock
market is not normal or rational in its behavior but a stock's price should
should be expected to stay within the bands around 90% of the time
and if you look at the candlesticks that's that seems to play out that way
it does stay within the bands most of the time but not all the time
since the stock's price is usually contained within the upper and lower
bands we can say about 90% of the time some traders will buy a stock when it
touches the lower band and then sell the stock when it touches the upper band
which kind of makes sense if it stays within the bands most of the time you
can buy at the lower band and sell at the upper band and you can just kind of
rinse and repeat that over and over buy here sell here buy here sell here
but please note that this method is not 100% reliable and stock prices can often
break right through the bands oftentimes the method works better with less
volatile stocks that makes sense because less volatile stocks stocks that don't
make huge moves as much are more likely to remain contained within the bands all
right but even less volatile stocks can just bust right through the bands either
to the upside or the downside and just keep going for example in earnings
reports can cause a candlestick to just shoot right through the bands could just
break right through it so don't count on this a hundred percent of the time
sometimes the upper and lower Bollinger Bands will squeeze or contract they'll
come very close together like we see in the middle of this chart okay we can see
right around here the band started started to squeeze together and they
remained squeezed for well if each one of these is one trading day this is
several weeks it remained in a squeezed State here
when the upper and lower bands have been squeezed together for a while
this means that volatility is low but it won't stay low forever at least I can't
think of any stock that stays you know that that has very low volatility
forever at some points volatility is going to
pick up most likely therefore we might expect volatility to increase soon after
you know after it's been squeezed for a while and a big move might happen in the
near future now again that's might okay could happen okay there's no there no
guarantees here in the stock market the big move could be to the upside like
this one or the downside in this chart the buildup of squeezed tension was
finally released and in this case the big move was to the upside
since it's difficult to know whether the big move will be a breakout to the
upside or a breakdown to the downside some options traders will buy a straddle
or a strangle in this chart because the move prior to the squeeze here okay the
squeeze is here and the move prior to it was an up move it made sense at least in
hindsight that the move after the squeeze would likely be another up move
again that's not totally reliable but that is something to think about
once again this method is not 100% reliable since Bollinger Bands squeezes
can last for a very long time before any breakouts or breakdown occurs in the
final analysis the best method is to use your own judgement and possibly combine
Bollinger Bands with other indicators for example RSI MACD whatever you like
all right here's an example and I got this chart from stockcharts.com wanted
to give them credit this is a daily candlestick chart for Home Depot stock
and we can see the squeeze here okay the and this was for several weeks the
squeeze just built and built and built and finally it was released in this case
to the upside with a big big breakout here alright and notice that the the
standard settings and if you go on stockcharts.com the standard steadying
standard settings for a daily candlestick chart will be a 20 period
meaning it'll you know the midline will be the simple moving average for the
previous 20 closing prices for the for the past 20 periods or candlesticks and
two standard deviations below to to the you know to above the midline and two
standard deviations below the midline alright so 20 and 2 is standard but you
can adjust these you can use Bollinger Bands on
practically any timeframe not just daily charts and this is from Google Finance
this chart here we see a two-minute candlestick chart for Microsoft stock
okay so each candlestick here represents two minutes of price action so this
might be a good chart for day traders note how the Bollinger Bands squeeze on
the right side this is a long squeeze here ends with a breakdown okay so we
can see a squeeze here and then a break down it broke to the downside here when
the squeeze tension was finally released here's another squeeze here which broke
to the upside but this just goes to show that you know squeezes don't all
Bollinger Band squeezes don't always end with a breakout sometimes it can end
with a breakdown all right so that was an introduction to Bollinger Bands of
course there's much more to learn about them but I hope this introduction at
least gave you a starting point so if you like this video
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stocks or options or whatever you can email me anytime my name is David Modell
and my email address is David Modell at gmail.com thank you so much for watching
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