School Corner
Breakout following contracting bands Observe on the chart below how the BP share price consolidated at the end of December and the bands contracted. This indicated a decrease in volatility. When the bands contract it is a warning that the price will likely move sharply up or down. In this example the breakout occurred to the upside. When the price closes above the upper band after a period of low volatility it is a signal to buy, the implication being that the rally will continue in the short term. Similarly, had the price broken down below the lower line, BP would have been a sell.
“The norm is to use a 20-period moving average for the middle band and 2 standard deviations to calculate the upper and lower band.�
CHART - BP SHARE PRICE
88 | www.financial-spread-betting.com | March 2013