The Bands chart is a trendline tool that helps traders determine whether an asset’s prices are high or low on a relative basis with a view to selecting potential entry and exit points. Our Bands chart incorporates market data from our proprietary data warehouse and displays as a candlestick chart overlaid with three oscillating lines, or bands.

The middle band is a simple moving average. The upper and lower bands positioned above and below the moving average band are driven by a particular number of standard deviations of price. By comparing the positions of the upper and lower bands to the asset’s price position candlesticks, a trader may be able to determine if the asset’s price is relatively low or relatively high.

When the price continually touches the upper band, it can indicate an overbought signal, increasing the possibility of a price reversal to the downside. This may appeal to traders looking for an exit. However, should the price continually touch the lower band, it can indicate an oversold signal; increasing the possibility of a price reversal to the upside. This may appeal to traders looking for an entry.

If the price moves out of the bands continually in one particular direction, it may indicate that the asset is in a strong trend. However, if the price move outside of the band is short-lived, then the strong trend indication should be disregarded.

When the bands move apart by an unusually large amount, volatility is increasing and the current trend may be ending, so traders may wish to consider their positions.

Conversely, the bands tightening around the moving average band during a period of low volatility, may signal upcoming volatility and a sharp price move in either direction. Greater price moves may happen if the bands are the narrowest they have been for the last 90, 180, or 365 days. A sharp move following band tightening may be the beginning of a new trend; however, it may also be a false move in the opposite direction, which then reverses before the actual trend begins.

It is recommended to consult additional charts within the Range Report, such as the Moving Average Convergence/Divergence (MACD), On Balance Volume, and RSI, to help confirm the strength of the Bands chart’s signals.

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