What is a Bulge?
A bulge, or bulge line, alludes to a plot line that addresses a predetermined number of standard deviations over the middle of a Bollinger Band\u00ae indicator. The mid-point is ordinarily a 20-day simple moving average (SMA) of the asset's price. Consequently, the bulge line is the upper most line on the Bollinger Band\u00ae technical analysis indicator.
Everything the Bulge Says to You
A bulge, or bulge line, is a crucial part of Bollinger Bands\u00ae, a technical indicator developed by analyst, investor, and creator John Bollinger. They are a set of three lines:
- The 20-day simple moving average of an asset's price, which is the middle line.
- An upper line, or bulge, which is a predetermined number of standard deviations over the middle line.
- The lower line, which is a predetermined number of standard deviations below the middle line.
The number of standard deviations that are utilized is discretionary, however the default is two standard deviations.
Standard deviation is a statistical concept that portrays the average distance of data points in a sample from the average of that sample. In stock trading, standard deviation is a measure of volatility. The larger a standard deviation in a set of stock prices, the higher its volatility.
As per John Bollinger, in his book, Bollinger on Bollinger Bands, "Bollinger Bands\u00ae are bands drawn in and around the price structure of a chart. Their purpose is to give relative meanings of high and low; prices close to the upper band are high, prices close to the lower band are low."
The bulge can be an important instrument for users of Bollinger Bands\u00ae to choose when to buy, sell, or short sell.
Bollinger Band Bulge Strategies
There are different Bollinger Band strategies. Here we will zero in on a few standard understandings of the upper band.
One of the principal utilizes is trading M-tops. This is the point at which the price makes a high, pulls back, then, at that point, makes a comparative high (could be somewhat higher, lower, or equivalent) yet neglects to contact the Bollinger Band bulge. At the point when the price drops back below the pull back low, that is a sell signal. This is like a double top formation.
As a more overall rule, when the price contacts the upper band, that shows price strength. It's anything but a buy or sell indication all by itself, yet it can assist with analysis. Assuming that a price is ceaselessly raising a ruckus around town hand, and normally not arriving at the lower band, that asset is reasonable moving unequivocally higher.
Illustration of Bollinger Band Bulge in a Stock
The chart of Meta (META), formerly Facebook, shows a M-top pattern utilizing the Bollinger Bands\u00ae. The price ascends along the bulge. Then it pulls back and attempts to rally once more. The price can't match the prior high, however more importantly the price doesn't contact the bulge on this subsequent endeavor. Then price then proceeds to drop below the pullback low. This was an opportunity to sell prior to a substantial price decline.
Not all instances of this pattern will bring about a large price drop.
The Difference Between the Bulge and Envelopes
The bulge is regularly two standard deviations over the mid-point of the Bollinger Band\u00ae. Envelopes are an alternate indicator, with a comparative look. Envelopes are normally moving averages put above and below another moving average, or the upper and lower bands are set a certain percentage or dollar amount above and below a mid-highlight make an envelope around the price.
Limitations of Using the Bulge
The bulge is put a predefined number of standard deviations from a SMA. The picked settings might have minimal predictive ability. Price will run through the bulge sometimes, different times it won't arrive at it.
One thump against utilizing standard deviations is that many use them expecting that returns and risk depend on a normal distribution. As a result of trends, they are not.
Bollinger Bands\u00ae are best utilized related to different indicators and price action. Like the M-top model, this strategies searches at various cost factors as well as confirmation from the Bollinger Band\u00ae to trigger a trade.
No indicator works constantly. Additionally, various assets might require various settings for the indicator to be valuable.
- The bulge is utilized to dissect the strength of a vertical price move, and furthermore give potential sell signals when the price falls below a recent swing low after not arriving at the bulge.
- The bulge is the upper line of a Bollinger Band indicator.
- It is regularly found two standard deviations over the Bollinger Band\u00ae mid-line.