| While a background in statistics would always help, | | | | over-sold. |
| not every investor will need such in-depth knowledge | | | | A word of caution: do not base trades solely on the |
| to know when to buy and sell securities. In fact, | | | | Bollinger Bands. If the underlying fundamentals |
| most discount brokerage accounts now provide | | | | suggest that there is a non-systemic reason for the |
| traders with even the most basic technical analysis... | | | | security price being oversold, then it does not matter |
| and for traders who do not have access to such | | | | where that security is trading; it is heading down (e.g. |
| features, Yahoo! Finance under its "Charts" link can | | | | Citigroup in 2007-08, General Motors in 2007-08 and |
| provide anyone with enough analysis to help make a | | | | so on). |
| trading decision. | | | | When the Price is too High |
| One of the most obvious and basic technical analysis | | | | Likewise, when a security's price is trading closer to |
| tools that a trader will want to use when trying to | | | | the upper Bollinger Band, then chances are quite high |
| make trading decisions is the Bollinger Bands overlay. | | | | that it will correct and trade closer to the moving |
| This tells investors whether a security price has been | | | | average or right between the two bands at some |
| trading too high or too low based on volatility levels. | | | | point in the near future. When shares trade this close |
| In more advanced charts, plotting a moving average | | | | to the upper band, it is more prudent to sit tight and |
| will help define "too high" and "too low," but in some | | | | wait for the bands to either normalize in a steeper |
| cases it is not all that relevant anyway. | | | | upward trendline or for the security to correct. |
| When The Price Is Too Low | | | | Buying at the upper band is a risky proposition. |
| Investors who are anxious about establishing a | | | | Even if there are underlying fundamentals to support |
| position in a particular security like to see that their | | | | the strong buying trend in the security the Bollinger |
| security has been trading closer to the lower Bollinger | | | | Bands will respond by trending upward. The riskier |
| Band (the gray line at the bottom). Ideally, the | | | | the situation, the wider those bands will become, |
| security should be trading on or below the line, | | | | therefore waiting for the bands to narrow is a more |
| signalling quite clearly that the security has been | | | | prudent thing to do. |