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See that Excel only sees 15 significant digits in Excel. Learn that Excel 2007 has 100 Undo, whereas Excel 2003 only had 16.

In This Series learn 17 amazing Finance Tricks. Learn about the PMT, PV, FV, NPER, RATE, SLN, DB, EFFECT, NOMINAL, NPV, XNPV, and the CUMIPMT functions that can make your financing tasks much easier in Excel. See how to use the PMT function in the standard way, but also see how to use it while incorporating a Balloon payment or a delayed payment. Lean how to translate a Nominal interest rate into an Effective Interest rate. Learn how to calculate how long it takes to pay off a credit card balance. Lean how to calculate the Effect Rate on a Payday loan. And many more financing Tricks!!

The Excel Finance Tricks 1-17 will show an assortment of Excel Financing Tricks!

Formula

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The link that I refer to on Standard Deviation is here: http://en.wikipedia.org/wiki/Standard_deviation

The link that I refer to with more resources on Bollinger Bands is here:

http://www.informedtrades.com/tags/index.php/bollinger%20bands/

In our last lesson we learned about the Stochastic Oscillator and how traders use this in their trading. In today’s lesson we are going to learn about an indicator which helps traders gauge the volatility and how current prices compare to past prices.

Bollinger Bands are comprised of three bands which are referred to as the upper band, the lower band, and the center band. The middle band is a simple moving average which is normally set at 20 periods, and the upper band and lower band represent chart points that are two standard deviations away from that moving average.

Example of Bollinger Bands:

Bollinger bands are designed to give traders a feel for what the volatility is in the market and how high or low prices are relative to the recent past. The basic premise of Bollinger bands is that price should normally fall within two standard deviations (represented by the upper and lower band) of the mean which is the center line moving average. If you are unfamiliar with what a standard deviation is you can read about it here http://en.wikipedia.org/wiki/Standard_deviation. As this is the case trend reversals often occur near the upper and lower bands. As the center line is a moving average which represents the trend in the market, it will also frequently act as support or resistance.

The first way that traders use the indicator is to identify potential overbought and oversold places in the market. Although some traders will take a close outside the upper or lower bands as buy and sell signals, John Bollinger who developed the indicator recommends that this method should only be traded with the confirmation of other indicators. Outside of the fact that most traders would recommend confirming signals with more than one method, with Bollinger bands prices which stay outside or remain close to the upper or lower band can indicate a strong trend, a situation that you do not want to be trading reversals in. For this reason selling at the upper band and buying at the lower is a technique that is best served in range bound markets.

Example of Buying and Selling at the Upper and Lower Band:

Large breakouts often occur after periods of low volatility when the bands contract. As this is the case traders will often position for a trend trade on a break of the upper or lower Bollinger band after a period of contraction or low volatility. Be careful when using this strategy as the first move is often a fake out.

Example

As Bollinger bands paint a good picture directly on the price chart of how high or low price is relative to historical prices, this is a good indicator to use in conjunction with other methods such as some of the chart patterns that we have learned so far and some of the candlestick patterns which we will learn in future lessons. Below is one such example:

As Bollinger Bands are one of the most popular indicators around I have created a special page on InformedTrades.com which lists multiple resources for those looking for more information on trading Bollinger Bands.

That’s our lesson for today. You should now have a good understanding of Bollinger bands and how traders use these in their trading. In our next lesson we are going to go over the Average Directional Index or ADX, which helps traders identify the strength or weakness of a trend so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to have them in the comments section below, and have a great day!

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