The debate over whether Bollinger Bands are Effective can be best answered by the mechanics of the technical tool on a practical basis. Represented by a trend where the lines are plotted through choosing a simple moving average for twenty days and two units of deviation from the mean. This approach basically claims that stock prices always move between an upper and a lower band depending on the period used in calculating the average.
Bollinger Bands are technical indicators and usually consist of three colored lines that represent expected levels. The middle line is the simple moving average, the top line is a simple moving average plus a certain number of deviation units, the lower line is a simple moving average minus a certain number of deviation units. The tool has been used throughout industry since the 1980s.
The tool plots the highs and lows in any market which helps determine how trends are swinging and during which time frames the volatility is ains occurring. The tool is used to plot accidents, weather, prices, and inventories.
These technical indicators are used commonly by investors in financial markets. This tool is an effective stock price indicator because it provides relative boundaries of highs and lows. Results from this indicator provides clues to the investor which help interpret market trends and patterns. This information can also help predict the future behavior of a particular market and maximize profits.
Technical analysis is composed of graphical and numerical analysis. Graphical analysis is based on the simple observation of prices and volumes levels, as well as the existence of characteristic graphical figures. Numerical analysis uses mathematical constructions. On the basis of prices, Bollinger Bands are created. Unlike technical and graphical analysis, this technical indicator gains most interest and popularity from its predictive capacity.
