In celebration of Talking Numbers' Chart Week, we have the inventor himself – John Bollinger – on to explain how they work. And, he even brought an example to show why he thinks one stock is ready to break out on the upside.
To be sure, Bollinger Bands are not easy to calculate by hand but most major stock charts, such as those on Yahoo! Finance, include them. (For a detailed discussion on the math behind Bollinger Bands, visit BollingerBands.com's very in-depth tutorial here.)
But, for the unversed, here's how John Bollinger explains it to Talking Numbers:
"The Bands are actually quite simple. There are three lines: the middle band defines the trend, whether stocks (or futures or forex or whatever) are rising or falling. And the upper band and lower band define whether prices are relatively high or relatively low. So, by definition, prices are relatively high on the upper band and they're relatively low at the lower band. You can use that information in pattern recognition or to compare price action to indicators and to arrive at rigorous investment decisions."
As an example, Bollinger takes a look at Diamond Offshore Drilling. According to Bollinger, an energy stock like Diamond Offshore is a precursor to a larger economic trend.
Want to see how the Bollinger Bands inventor uses his creation to analyze a stock? Watch the video above to learn more.
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