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Last Updated : Jun 05, 2019 10:46 AM IST | Source: Moneycontrol.com

Use Bollinger Bands and Money Flow Index to identify overbought or oversold conditions

Bollinger Bands are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases

Chandan Taparia

In technical analysis, we will be discussing more technical indicators such as Bollinger Bands and the Money Flow Index (MFI), which is a technical oscillator that uses price and volume for identifying overbought or oversold conditions in an asset.

It can also be used to spot divergences which warn of a trend change in price while Bollinger Bands are a type of statistical chart characterizing the prices and volatility over time of a financial instrument or commodity.

Bollinger Bands:

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Bollinger Bands are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increases and contract when volatility decreases. Their dynamic nature allows them to be used on different securities with the standard settings. For signals, Bollinger Bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend.

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Money Flow Index (MFI):

The Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. MFI is also known as volume-weighted RSI. MFI starts with the typical price for each period.

Money flow is positive when the typical price rises (buying pressure) and negative when the typical price declines (selling pressure). A ratio of positive and negative money flow is then plugged into an RSI formula to create an oscillator that moves between zero and one hundred. As a momentum oscillator tied to volume, MFI is best suited to identify reversals and price extremes with a variety of signals.

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The author is Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jun 5, 2019 10:46 am
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