Effectiveness of Bollinger Band in Signaling Essay

Fiscal markets are the most hard markets to run in when finding the monetary value at which stocks ( bonds and foreign exchange are merchandising ) . Since stocks trade for long continuance of clip. bargainers need to cognize the appropriate clip to purchase or sell their stocks. To make this. they must hold perfect information on the tendencies in the market through the market indexs. These index are ever non obvious and at times require proficient devices to demo precisely how the tendency of a peculiar stock hour angle been traveling for a period of clip ( Bollinger 56 ) .

A bargainer can cipher divergences of the monetary values of that peculiar that he/she intends to merchandise and detect it. Though this is one manner of detecting the indicants of stocks in fiscal market. there have been other agencies of detecting the tendencies which are easier to utilize. One of these is the Bollinger Band which was developed by John Bollinger in the early 1980s ( World Wide Web. investopedia. com ) .

Bollinger set is a proficient index of a stock in the fiscal market which consists of a centerline/middle line and two sets that indicate the divergences of the stock’s public presentation in the market from their pre-determined true trading value ( Bollinger 56 ) . These two sets indicate whether the stock was over-trading or under-trading. The upper set indicates the extent at which the monetary values went above the true value while the lower set indicates the extent at which the monetary values went below the true value.

Through such indicants. bargainers know when to sell or when to purchase and do net incomes. When the upper set is high above the in-between set. it means that the monetary values are high above the true value and when it is below the monetary values are lowest below the true value. These bands merely show indicants and they are non existent purchasing or merchandising monetary values. When the set is high. it is said to be spread outing such that bargainers would desire to sell the stocks while the set is below the center line it is said to be undertaking and the bargainers would be willing to purchase the stocks ( Murphy 344 ) .

Bollinger bands technique is used along with other techniques ( like the Profit Magic of Stock Transaction Timing and Dow Jones Industrial Average ) to give the best consequences in stock trading. This technique is really effectual in that accurate tendencies can be observed since the sets adapt dynamism as the monetary values travel up or down. The stock monetary value is said to hover between the two sets ( Murphy 348 ) . They can besides be customized to run into each bargainers demands. Bollinger bands can be set in a manner that they merely show what each bargainer needs in the market and therefore the kit focuses on a broad scope of investor in the fiscal market ( hypertext transfer protocol: //biz.

yokel. com ) . They besides show whether the monetary values are high or low and therefore bespeaking the scope of how the monetary value had moved in the market. This enables investors to cognize when to put off some of their stocks and when to get more. Largely they would get more when the monetary values are below the center line and shed-off or sell more when the set is above the center line. And when the monetary value is really much stopping point to the center line significance that the monetary values have non deviated from the true monetary value of that peculiar stock. no action should be taken ( Bollinger 92 ) .

Bollinger sets are besides consistent since they use the moving norm which is used in ciphering standard divergence. Therefore they give dependable information and at times investors need non necessitate other proficient analysis in doing their sell and purchase determinations ( The Quarterly Journal ) . The Bollinger set besides captures much informations and hence at a glimpse one can state the tendency of the stock much faster. Below are illustrations of analysis of international stocks to demo how effectual the Bollinger sets are: Intel Corp analysis for 2006: Intel’s lower Bollinger set closed below the center line on Dec.

22. 2006 and this was a signal for over merchandising of the companies stock. ( World Wide Web. investopedia. com ) . New York Stock Exchange: On June 12. 2006 the stocks broke the lower Bollinger band bespeaking that there was over merchandising. Through these signal proficient bargainers would put orders to purchase. The Bollinger set showed the utmost terminal of its lower set the undermentioned twenty-four hours seting much force per unit area for investors to sell. Yahoo! : On Dec 20th. 2006. Yahoo Company’s stock lowered the set which called for more purchasing. ( Lifted from StockCharts. com )

The chart shows that there was selling force per unit area on the stock and it turned out that most people were selling their stocks whereas the scheme was that of purchasing. Though Bollinger band analysis in the stock market has advantages. there are state of affairss when this method does non give the expected consequences and it turns out that the market is runing in the opposite way. Even if this is the instance. the sets still oscillate and the tendencies will go on to demo but the monetary values do non alter rapidly and therefore the effects are non that terrible.

Over clip. since stocks trade for long periods of clip the scheme will be right and the trading goes back to normal ( Rachev et al 126 ) . IBM: For case. on February 26th 2007 IBM was merchandising below the lower Bollinger set. This meant that the force per unit area was mounting and coercing the proficient bargainers to sell more. Since the monetary values were that low. the scheme was to purchase stocks the undermentioned twenty-four hours on which it turned out that the twenty-four hours was merchandising low ( The Quarterly Journal ) . This was unnatural in fiscal markets and this led to toss off autumn of the stocks even greater.

( Lifted from StockCharts. com ) The stocks were sold good and the concern would shut below the lower set till March 5th when the merchandising force per unit area ceased. This resulted to the set get downing to spread out and nearing the center line although immense losingss had already been incurred. Apple Inc: On 21st December 2006. Apple closed below the lower Bollinger set which required that stocks be bought the undermentioned twenty-four hours. The stocks traded on the lower set and therefore the merchandising force per unit area continued to take the stocks down.

This tendency continued until 27th December when some alleviation was felt. ( Lifted from StockCharts. com ) In decision. Bollinger Bands are merely like traveling norms which contradict and expand as they move. As they move they form alone forms that investors are able to detect. Bollinger sets are used as signals of when to sell or purchase a stock in the fiscal markets. Though used as signals. they are non the concluding indexs as to whether the stocks are to be traded but other factors need to be considered ( Schlossberg ) .

These sets are easy to utilize and one demand non travel for categories to larn about how to utilize them in doing determinations about stocks. Since monetary values in the short tally are non predictable. investors can non do determinations based on short-run period but since Bollinger sets are a contemplation of a longer period of clip. they can do their determinations on that ( Schlossberg ) . List of References John Bollinger: The eSignal Bollinger Band Tool Kit. accessed on 25th September 2008 from hypertext transfer protocol: //www. esignal. com/solutions/studies/bollingerband_article. aspx. John Bollinger: Bollinger on Bollinger Bands: McGraw-Hill Companies.

2001 John Devcic: Narratives From The Trenchs: A Simple Bollinger Band Strategy: accessed on 25th September 2008 from. hypertext transfer protocol: //www1. investopedia. com/articles/trading/07/bollinger. asp Boris Schlossberg: Using Bollinger Band “Bands” To Gauge Trends: Accessed on 25th September 2008 from & lt ; 38. 102. 154. 10/articles/trading/05/022205. asp & gt ; Bollinger Charts lifted from StockCharts. com on 25th September 2008 John J. Murphy: Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications: New York Institute of Finance. Prentice Hall Press.

1999 324-430 The Quarterly Journal of Business and Economics. Spring 2007 Bollinger Bands: Accessed on 25th September 2008 from hypertext transfer protocol: //biz. yokel. com/charts/guide13. hypertext markup language. Rachev ; Svetlozar T. . Menn. Christian ; Fabozzi. Frank J. . Fat Tailed and Skewed Asset Return Distributions. Deductions for Risk Management. Portfolio Selection. and Option Pricing. John Wiley. New York ( 2005 ) 123-145 Technical analysis in the forex / Bollinger set: Accessed on 25th September 2008 from World Wide Web. forexchannel. org/technical_analysis/bollinger_band/