Technical analysis of the stock market comes with a great variety of tools to help the trader decide when to purchase a security. One such tool is the Bollinger band, and this tool is arguably one of the most useful tools for technical analysis.
The Bollinger Band was created by a professor called John Bollinger in the early eighties. It is used to measure volitity in a particular security. So called “Bollinger bands” are represented on the chart by a line below the price of the stock and above the price of the stock.
Most stock analysis tools allow the option of displaying the Bollinger Band, but if yours does not then you can go to www.msnmoney.com and check out the Bollinger Band of a particular stock. All you have to do is go to the website, click on charts, and then configure the Bollinger band to be displayed.
Now that we have some idea of what a Bollinger Band is it is time to learn why a Bollinger Band is important, and how it can be used. When the two lines on a Bollinger Band come together against the line representing the price of the stock, then a Bollinger Band “squeeze” has occurred. This squeeze indicates a substantial breakout in the price.
This breakout can be either positive or negative, but it generally means that the stock price will either experience substantial short term gain or loss. By only purchasing stocks when the Bollinger Bands are squeezed you will most likely avoid staying out of “stale” markets that remain at the same price for years at a time.
Like most technical analysis trading tools Bollinger Bands are far more helpful in the short term, than they are in the long term. For long term investments that fundamental analysis (the less sexy of the two alternatives) is probably the better choice.
By applying your newfound knowledge of the Bollinger Band squeeze to your trading strategy you will be able to correctly time your entrance or exit into a market. No short term trader likes to limit their profit by tying up a significant amount of funds into a stagnant market or security. When used in conjunction with fundamental analysis techniques one is normally able to determine if the Bollinger band squeeze will breakout upwards or downwards. With that being said the best way to utilize your knowledge of the Bollinger Band is by combining it with common fundamental analysis.