Bollinger Bands Example


Thus, the squeeze tells more than just volatility; it predicts stock behavior. All traders widely use the Bollinger bands strategy (professional and at-home traders). The reason is the versatility of entering a trade’s deepest part. A professional trader considers many things before making the simplest decision on a trade because the least decision could be a success or misfortune.

short position

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

What are Bollinger Bands and how do you use them in trading?

For an uptrend, stop orders should be set at the lowest price of the first bar that broke the upper line of the neutral zone. For a downtrend, the stop order position is determined by the high of the first bar that breaks the lower line of the neutral zone. When the distance of one stop loss is passed, Kathy recommends moving it to breakeven.


Once a stock fails to reach a new peak, traders tend to sell the asset at this point to avoid incurring losses from a reversed trend. Technical traders monitor the behavior of an uptrend to know when it shows strength or weakness, and they use this as an indication of a possible trend reversal. In this section, I have collected the most popular Bollinger Bands strategies. We will look at various methods within the day, in the lowest timeframes, learn how to squeeze the bands and use their signals in conjunction with other indicators.

Bollinger Bands | Technical Analysis Indicator Explained

They essentially help you identify possible price reversals by determining overbought and oversold levels using standard deviation. When an asset is in a downtrend, the SMA and the upper and lower lines of the Bollinger Bands follow. Bollinger Bands are a technical analysis tool used to analyze a traded asset’s price and volatility to make informed buy or sell decisions. They consist of three lines or bands — one simple moving average line and two standard deviations of the price lines. Although Bollinger Bands are helpful tools for technical traders, there are a few limitations that traders should consider before using them. One of these limitations is that Bollinger Bands are primarily reactive, not predictive.

  • Importantly, however, these conditions should not be taken as trading signals.
  • Get a custom-designed trading program tailored to your individual needs, skill level, and schedule.
  • Another interesting or useful way you can use Bollinger Bands is as a trend filter.
  • You can also use Bollinger Band squeezes to trade in anticipation of breakout.

The initial take must be at least twice the stop loss length. Since we are talking about trend trading, it makes sense to use the trailing stop and wait for the signal of the trend end. This signal can be one of the patterns described in the analyst’s book or another narrowing of the channel. Inputs – here you can set the period and the number of standard deviations.

Bollinger Bands Trading Strategies

The breakout is not a trading signal and many investors mistake that when the price hits or exceeds one of the bands as a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement. Often, the next price movement is a strong move upwards off the second low. Traders may look to go long, targeting the middle or upper band. Other indicators such as support and resistance lines might prove beneficial when a trader decides whether or not to buy or sell in the direction of the breakout. Thus, the price should not last and should “revert back to the mean.” This generally means the 20-period simple moving average.

Secondly, you need to add or subtract a specified number of standard deviations from the simple moving average. This produces the values which define the upper and lower bands. A Bollinger Band® is a momentum indicator used in technical analysis that depicts two standard deviations above and below a simple moving average. One of the main limitations is that it shouldn’t be used as a standalone tool. In fact, Bollinger Bands® should be used with other non-correlated indicators. Doing so may give you additional market signals that are much more direct.

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These can be both classic RSI and MACD, as well as more complex volume indicators or entire trading systems. The only condition is that there is no connection between the calculation of the Bollinger Bands and additional indicators. Bollinger Bands are good for confirming chart patterns such as triangles, double and triple tops and bottoms, head and shoulders, and other W-shaped bottoms and M-shaped tops.

This means knowing how to spot certain patterns as you analyze the charts. Bollinger Bands can be useful for tracking trends in price movements, relative to the amount of volatility the market is experiencing. For instance, you can use them to gauge how likely a stock’s price trend is to continue in the near- or long-term, based on whether the movement is up or down. They can also be helpful for determining when a period of low volatility may be followed by a period of increased volatility or vice versa. On the other hand, bounces are based on the premise that price tends to get drawn towards the average.

Another drawback is that they are calculated using a simple moving average. That’s because older price data is weighted in the same way as recent data. In its most basic form, an M-Top is similar to a double top.

  • Our tools are for educational purposes and should not be considered financial advice.
  • A Bollinger Band overlay can be set at (50,2.1) for a longer timeframe or at (10,1.9) for a shorter timeframe.
  • To use this strategy, traders look for periods where the upper and lower bands are close to each other.
  • Once they meet, you can exit the market and look for other opportunities.
  • When trading with Bollinger Bands, traders should understand that standard settings will not suit all strategies.

The second low must not be lower than the first one, and the second low mustn’t touch or spike the lower band. This bullish trading setup is confirmed when the price action moves and closes above the middle line . The price shouldn’t touch the lower band when it’s in a strong uptrend.

Bollinger Bands®: What They Are, and What They Tell Investors – Investopedia

Bollinger Bands®: What They Are, and What They Tell Investors.

Posted: Sun, 26 Mar 2017 07:58:18 GMT [source]

The and lower bands are then set two standard deviations above and below this moving average. The bands move away from the moving average when volatility expands and move towards the moving average when volatility contracts. Bollinger Bands are comprised of three lines – the upper, middle, and lower band. The middle band is a moving average, and its parameters are chosen by the trader.

Similarly, it triggers a’s mind to make a buying decision, as they assume it a great opportunity. The prices can flip back and forth, so one should also bear this thing in mind. Here are the various ways a trader can use Bollinger Bands Tool, to make profits in Stock market.

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