(2) Alteration Of Standard Deviations Give More Reliable Signals
It is one of the most powerful characteristics of Bollinger Bands in technical charts. Standard deviations are meant to determine the distance between the upper & lower band.
Bollinger Bands® are usually set to 2 standard deviations by default. But, traders or investors can modify the standard deviation to 2.5. This modification will help them to get wider bands that can capture more price actions.
With 2.5 standard deviations, 99% of all price action falls between the two bands. On the other hand, 2 standard deviations, only 85% to 90% of all price actions will fall between the two bands.
Therefore, any violation of the outer bands will tend to become more meaningful & reliable signal for true breakout with 2.5 standard deviations.
(3) Buy Zone & Sell Zone Within Bollinger Bands Is A Good Opportunity
It is one of the most wonderful characteristics of Bollinger Bands in technical charts. Bollinger Bands® can be used to diagnose the current trend quite accurately.
You need to set two sets of Bollinger bands—one set using the “1 standard deviation” while other one using the “2 standard deviation”.
If price channel is between upper bands +1 SD & +2 SD away from middle band then trend is up and the channel is referred as “Buy Zone”.
Similarly, if price channel is between lower bands -1 SD & -2 SD away from middle band then trend is down and the channel is referred as “Sell Zone”.
However, if price fluctuates between +1 SD band & -1 SD band then it is referred as “Neutral State” or “no man’s land”. Thus, traders can use these trading zones to make positions & generate profits quickly.
- Bollinger Band Analysis: MSGraphics