Bollinger Bands as Price Targets

There is a great technical indicator out there called the Bollinger Bands.  John Bollinger, the developer of this indicator is still trading with this method and great info from him can be found at www.bollingerbands.com.  You can add the indicator as an overlay on www.stockcharts.com

 

In rangebound markets or for rangebound stocks, I like to use them as price targets.  Take a look at the chart below.  The middle, dotted line, is a simple 20-day moving average.  The upper and lower bands are drawn 2 standard deviations away from the 20-day moving average.  For those of you who aren’t statisticians out there, standard deviation is a measure of variance or in market terms, volatility. 

 

 

In theory, 95% of all the stock price closings should be within the bands.  As the bands widen apart, it shows an increase in stock volatility (not to be confused with implied volatility).  As the bands narrow, stock volatility is narrowing. 

 

As bands begin to narrow, they can be used as nice price targets.  The 1^st target as the stock bounces off the bottom band is the 20-day MA.  If the price exceeds the 20-day MA, the second price target is the upper band.  As you go and buy stocks and options in this rangebound market, look at the bollingers for guidance on price targets.  For you bulls out there, look to stay bullish as long as the stock is trading in the upper range

 

For the above stock EXM…look to buy on the bottom band or on a break above the 20-day MA.

 

Happy Trades,

Jeff