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Bollinger Band - Trading on Volatility
 
Singapore

FerroChina
 

Figure 1: Use of Bollinger Band as Support and Resistance

During the month of January 2007 to April 2007, FerroChina’s stock price was well-resisted by the upper band, refusing to break new grounds. On the other hand, during the price retracements in early March 2007 and late April 2007, FerroChina was able to find good support level at the lower band that prevented the price from diving further.

The second application of Bollinger Band is in the powerful Bollinger Squeeze which trigger high probability buy and sell signals. The Bollinger Squeeze occurs when a stock protracted to a period of low volatility has the upper and lower bands appearing to be squeezed together. A buy or sell signal is generated when there is a Bollinger breakout from this squeeze of the lower and upper bands. Figure 2 shows the occurrence of the Bollinger Squeeze and the subsequent Bollinger breakout when the upper and lower bands begin to expand suddenly.

 
 
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