What is a Bulge
A bulge, or bulge line, refers to a plot line that represents one standard deviation above the 21-day simple moving average of a stock price. A bulge line is the uppermost line when plotting Bollinger Bands, in the course of a technical analysis of stocks.
BREAKING DOWN Bulge
A bulge, or bulge line, is a central component of Bollinger Bands, a technical indicator developed by analyst, investor and author John Bollinger. They are a set of three lines: the 21-day simple moving average of a stock’s price, the simple moving average one standard deviation above the 21-day simple moving average, known as the bulge and the simple moving average one standard deviation below.
Standard deviation is a statistical concept that describes the average distance of data points in a sample from the average of that sample. In stock trading, standard deviation is an import measure of volatility, and the larger a standard deviation in a set of stock prices, the higher its volatility. According to John Bollinger, in his book, Bollinger on Bollinger Bands, “Bollinger Bands are bands drawn in and around the price structure of a chart. Their purpose is to provide relative definitions of high and low; prices near the upper band are high, prices near the lower band are low.” The bulge, therefore, can be an important tool for users of Bollinger Bands to decide when to sell a stock, or even short sell that stock. If the price of a stock has surpassed the bulge line, that means it is very expensive.
Example of Bulge
Let’s say you own shares in the Toledo Rocketship Company, and you use Bollinger Bands to analyze the price of the stock. Over the past twenty-one days, the stock has traded on average at $20. The standard deviation of the stock price over that same period is 3, meaning that, on average, the stock price within $17 and $21, for the majority of the previous 21 days. The bulge line of the Toledo Rocketship Company, therefore, sits at $23. That afternoon, the price of the Toledo Rocketship Company gets bid up to $27, surpassing the bulge. According to the standard interpretation of Bollinger Bands, this would be a good time to sell the stock, although it’s important to understand whether there is a change in public information about the company, like an announcement that profits or revenues were much higher than previously thought, that could justify such a run up in price.