How to Use Bollinger Bands

The width of the upper and lower bands indicates volatility. When this range of Bollinger Bands is tight, it is said to be in a squeeze. When this range is wide, we can expect the market to be very volatile.

Suddenly failing to reach the bands can signal fading momentum. Ignore the next possible long entry signal in April 2015 because Twiggs Money Flow signals a bearish divergence. But first, let’s review the key Bollinger Band trading signals. Alternatively, look for a bearish breakout when the price goes up and the indicators are flat or making a lower top. The bandwidth, i.e. difference between the upper and the lower Bollinger Bands, corresponds to market volatility. As you can see, while the above analysis is surface level, you require at least some context to have conviction in your trades. If you search Google or YouTube for ‘Bollinger bands strategies,’ the vast majority of them will mean reversion strategies.

Stochastic indicator

The downtrend can last for short or long durations – either minutes, hours, weeks, days, months, or even years. Investors must identify any sign of downtrends early enough to protect their investments. If the lower bands show a steady downtrend, traders must be cautious to avoid entering into long trades that will prove unprofitable. Bollinger Bands can be used to determine how strongly an asset is rising and when it is potentially reversing or losing strength. If an uptrend is strong enough, it will reach the upper band regularly. An uptrend that reaches the upper band indicates that the stock is pushing higher and traders can exploit the opportunity to make a buy decision.

The markets move from a period of high volatility to low volatility . If you want to have a higher probability of success with the Bollinger Band strategy, then you’ll need a few confluence factors coming together before you trade the bands.

How to calculate Bollinger bands

Notice that this M-top is more complex because there are lower reaction highs on either side of the peak . This evolving top formed a small head-and-shoulders pattern. In its most basic form, an M-Top is similar to a double top. However, the reaction https://www.bigshotrading.info/ highs are not always equal; the first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. First, a security creates a reaction high above the upper band.

As a technical analysis tool, Bollinger Bands offer reassurance when traders make certain decisions. When trading near the outer boundaries, they can be confident there’s resistance or support . But Bollinger Bands alone are an insufficient signal as they simply offer a perspective on the price relative to historical volatility. Technical analysis applies this method for anticipating a price action. Bollinger Bands appear as three bands, the middle being a simple moving average usually plotted in a 20-minute period. Bollinger Bands are commonly used as a tool in technical analysis in a range of financial markets, including forex.

Adjusting the Settings

It’s essential to understand the math behind the indicators you use to make trading decisions. It’s also important to realize that academic math is confusing, and for some reason, the use of the Greek alphabet is standardized. The standard deviation of a dataset measures how much the average data point varies from the mean. The picture above shows that the reversal down from the upper BB is confirmed by the bearish candlestick pattern and the bearish divergence between RSI and the price chart.

They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time. Donchian Channels are moving average indicators developed by Richard Donchian.

Riding the Band Breakout on High Volume

bollinger bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend. Signals based on the distance between the upper and lower band, including the popular Bollinger Band Squeeze, are identified using the related Bollinger BandWidth indicator. Narrow bands indicate a squeeze, which means that volatility is low. But remember, since volatility is mean-reverting, the bands will probably expand, signaling a potential for an explosive move. A simple way to spot a squeeze is to identify when the bands are the narrowest they have been for the last six months. If the price pulls back within the uptrends, and it stays above the middle band and moves back to the upper band, that indicates a lot of strength.