When the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction. Watch out for a false move in the opposite direction which reverses before the proper trend begins. Bollinger Bands are a great tool for identifying trend pullback trade opportunities. Look for the bands themselves to be trending, higher highs and higher lows , and for the price to pull back to the counter-trend band. John Bollinger used the M patterns with Bollinger Bands to identify M-Tops. In its basic form, an M-Top is similar to a Double Top chart pattern.

If the stock goes parabolic or gaps up and then closes near its low while near the outside of the bands, this is often a good indicator that the stock will correct on the near-term. Another simple, financial investment manager job description yet effective trading method is to fade stocks when they begin printing outside of the bands. We’ll take this one step further and apply a little candlestick analysis to this strategy.

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For example, you shouldn’t trade when the bar overlaps or moves closer to the MA. Lastly, traders could potentially yield maximum profits by trading currency pairs with low spreads, such as GBP/USD, EUR/USD, etc. Bollinger Bands can provide reliable insights concerning volatility and trends but cannot work with 100% accuracy, like any other technical indicator. Only taking trades in the direction of the trend on a higher time frame will improve results.

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.

The thing that surprised me is that I couldn’t find many other famous authors or experts in the space. I’m not sure if this is because there aren’t many people interested or if other traders stay out of lessons in corporate finance the bands arena because John is so actively evangelizing his own indicator. Just as you need to learn specific price patterns, you also need to find out how bands respond to certain price movements.

My Journey with the Bands

Bollinger Bands are comprised of a Middle band , and Upper and Lower Bands based on Standard Deviation which contract and widen with volatility. A significant widening of the band may signal the end of a trend. On the other hand, a chart bottom occurring below the Lower Band followed by a bottom above the lower band generates a buy signal. The Upper and Lower Bands are used as a way to measure volatility by observing the relationship between the Bands and price.

These contractions are typically followed by significant price breakouts, ideally on large volume. Bollinger Bands® should not be confused with Keltner Channels. While the two indicators are similar, they are not exactly alike. Aside from how the bands/channels are created, the interpretation of these indicators is generally the same. Of course, each time frame is also suited to a particular style of trading, and Bollinger bands are adaptable enough to be extremely useful whichever time frame they are used in.

Related Terms

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. A low standard deviation forex animal means that most of the data is near the mean, while a higher standard deviation means that there is much higher variance in the data. This visual makes it simple to gauge how probable a range of outcomes is. The taller the center of the curve, the fewer outliers there are.

Strategy #4 The Squeeze – this is the best setup for the traders that want the profit potential of riding the bands but can take quick money as things go in your favor. You can take one of two approaches with the squeeze strategy. For the riskier traders, you can jump in before the break and capture all of the gains. More conservative traders can wait for the break and then look for a pullback setup in the direction of the primary trend. By default, a 20-period SMA and 2 standard deviations are used to calculate the Bollinger Bands. However, since P&F moving averages are double smoothed, it may be necessary to shorten the moving average period when placing this overlay on a P&F chart.

A Tool for Trend Traders and Faders

If the price is in an uptrend, and continually hitting the upper band , when the price hits the lower band it could signal that a reversal has commenced. If the price rallies again, it likely won’t be able to reach the upper band or the recent price high. When the price is in a strong uptrend it shouldn’t touch the lower band.

Technical analysis, on the other hand, uses charts and various technical indicators to forecast market conditions. The volume-weighted average price is another tool that traders can use to spot trends and otherwise assess market data. While both Bollinger bands and VWAPs track the average price, VWAP also accounts for the volume of transactions at any given price.

78% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Best suited for range trading with well-established support and resistance levels. Relies on the principle that price is likely to revert to its mean .

Exponential Bollinger Bands eliminate sudden changes in the width of the bands caused by large price changes exiting the back of the calculation window. Exponential averages must be used for BOTH the middle band and in the calculation of standard deviation. To apply this to stock prices, the more price volatility, the higher the standard deviation, and vice versa. A stock with a high standard deviation means that the price will very often sway far from the mean . 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.

When price action trades between the lower bands of both Bollinger Bands deviations, the potential of an extended downtrend is dominant. When price action trades between the upper bands of both Bollinger Bands deviations, the likelihood is of an extended uptrend. The most efficient method is to use a multiple Bollinger Bands Forex trading strategy with two Bollinger Bands, one with 2.0 standard deviations and a second one with 1.0 standard deviation. Advanced traders can also use them as a basis for reversal strategies or fading trends, or as part of a Bollinger Bands option strategy. It is much easier to be profitable trading trends than fading them, which is why counter-trend trading is better left to more experienced traders.

Bollinger Bands are based on an instrument’s simple moving average, which uses past data points. As a result, the bands will always react to price moves, and not forecast them. In other words, Bollinger Bands are reactive, not predictive, and are often referred to as a lagging indicator​, rather than leading. The center line is usually a 20-period simple moving average, and the upper and lower bands are by default a measure of price levels that are 2 standard deviations from the center. However, there are some extreme markets that may require different parameters, so test it yourself. For breakouts through the upper Bollinger Band, the signal to buy is the next candle that has a higher high, and closes higher, than the signal candle .

Bollinger Bands trading strategies

We need to have an edge when trading a Bollinger Band squeeze because these setups can head-fake even the best of us. Using the same chart from above, we can see that the rally off the first low created a near term overbought scenario. Let’s unpack each strategy, so you can identify which one will work best with your trading style. Now that we have covered the basics, let’s shift our focus over to the top 6 Bollinger Bands trading strategies. This signal reflects the market has made a strong run , and as part of a blowout, an extreme move is often seen before the market begins to retrace.

For a bearish trade, we are looking for a break of the upper band of the Bollinger Bands followed by an Engulfing candle. She is a financial therapist and is globally-recognized as a leading personal finance and cryptocurrency subject matter expert and educator. In another article you said that after accumulation market will moves to advance/ up ward direction . 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.

One of the more common calculations uses a 20-day simple moving average for the middle band. The upper band is calculated by taking the middle band and adding twice the dailystandard deviationto that amount. The lower band is calculated by taking the middle band minus two times the daily standard deviation.

The Squeeze

However, using only the bands to trade is a risky strategy since the indicator focuses on price and volatility while ignoring various other relevant information. One of the essential tools used for technical analysis in securities trading is Bollinger Bands. Its primary incentive is to help the trader establish a trend’s direction, spot potential reversals, and monitor volatility. The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the width of the bands are just that, defaults.

For example, a false breakout happens when an asset’s price passes through the trade entry point. It signals a trade but then moves back in the other direction, resulting in a losing trade. The bands contain a volatility indicator that measures a security’s relative high or low price compared to previous trades. The bands widen when there is a price increase and narrow when there is a price decrease.

He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch. The stock broke down in January with a support break and closed below the lower band. From mid-January until early May, Monsanto closed below the lower band at least five times.

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