Bollinger Bands: Strategy & Formula in Trading

bollinger bands

When bands contract in a narrow neck, the squeeze is highlighted by a sharp fall in Bollinger’s Band Width indicator as in the Microsoft chart below. A move outside the band indicates that the trend is strong and likely to continue.

bollinger bands

They are merely one indicator designed to provide traders with data regarding price volatility. John Bollinger suggests using them in conjunction with other non-correlated indicators that provide more direct market signals. As with most other technical analysis tools, Bollinger Bands, too, come with its own set of unique advantages and disadvantages. Therefore, it’s crucial to understand where this momentum indicator excels and where it fails to get the most out of its use. Moving averages can be set to different timeframes, depending on the trader’s strategy. These include a simple moving average​ and exponential moving average​ . The range of results in these three studies exemplify the challenge of determining a definitive success rate for day traders.

Why Use Bollinger Bands?

On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Similarly, prices can “walk the band” with numerous touches during a strong uptrend. The upper band is 2 standard deviations above the 20-period simple moving average. It takes a pretty strong price move to exceed this upper band.

  • You know the middle line of the Bollinger Bands is simply a 20-period moving average .
  • It is also prudent for one to use a combination of indicators when making an investment decision.
  • Narrow bands indicate a squeeze, which means that volatility is low.
  • One of these limitations is that Bollinger Bands are primarily reactive, not predictive.
  • W-Bottoms and M-Tops were part of Arthur Merrill’s work that identifies 16 patterns with a basic W-Pattern and M-Pattern, respectively.

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. The upper and lower bands are positioned on either side of the moving average band.

Uses of Bollinger Bands

That is, don’t short stocks in a bull market or go long in a bear market. In isolation, Bollinger Bands don’t produce absolute buy and sell signals. Instead, they indicate whether the price is relatively high or low, allowing for more informed confirmation with other technical indicators.

bollinger bands

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