Bollinger Bands Trading Strategy Bollinger Bands Indicator- Enrich Money

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Similarly, the price reaching or breaching the upper band indicates a slowing down of the downtrend. Bollinger bands consist of three lines- the period line and the upper and lower bands. For an investor, there’s nothing more crucial than the lowest points in the market. For instance, if you set it to 1, there is a 65% chance that the price will stay inside the bands and you might get to make less-precise assumptions, with less reliable signals. On 2, there’s a 95% chance that the price will stay inside the bands, promising you more accuracy. At 3, the greater range promises 99% chance of the price staying inside the bands.

  • The longer the squeeze, the bigger the target it promises.
  • When selecting trading indicators, also consider different types of charting tools, such as volume, momentum, volatility and trend indicators.
  • These bands are dynamic, which allow them to be used for different asset classes to understand price fluctuations and determine overall trends.
  • The bands are often used to determine overbought and oversold conditions.

They don’t always provide accurate data, thus it’s up to the trader to use band parameters that work the majority of the time for the asset being traded. Bollinger bands are used to measure a market’s volatility. This easy to learn indicator tells us whether the market is quiet or whether the market is volatile.


Finally the price rallies from here with consecutive strong bullish candles, confirming the Double bottom formation. However, price holds on to the lower band and does not fall beyond it losing its downside momentum. At any given time, we can grab the previous to previous candle by position -2 and previous candle by position -1.

bollinger bands trading strategies

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A Complete Guide to Understanding Bollinger Bands

Bollinger band was introduced by Mr. John Bollinger at 1980. It is one of the most widely used indicators known for its satirical approach. W-bottoms happen when the price chart makes a W pattern like in the above picture. This usually indicates a breakout in the positive direction. As you can see in the above picture, Bollinger bands come with three lines and are calculated as explained above.

When RSI is combined with Bollinger Bands, traders can spot the buy and sell positions in the chart. In Bollinger bands, a squeeze occurs when all the bands come close together, indicating the consolidation phase in the market. The squeeze means the low volatility in the market and potentially high volatility is waiting shortly providing trading opportunities when the bands move wider. When the squeeze phase is over, the price tends to make a healthy move in either direction.

Let us learn about Bollinger bands and see how you can use the indicator to strategize. Technical analysis tools are designed based on the theory that stock markets and their charts tend to show similar patterns before a trend or a momentum change. In simple words, analysts believe that if a stock goes ‘A-B-C’ before bouncing back from a negative trend twice or thrice, you could expect a bounce back the next time the stock goes ‘A-B-C’. Of course, stock markets are much more complex than that, but often, it is our best bet. Trading strategies usually require multiple technical analysis indicators to increase forecast accuracy. Lagging technical indicators show past trends, while leading indicators predict upcoming moves.

If you also want to trade in stocks with the help of the Bollinger Band trading strategy, then you can keep the following things in mind. At the same time, when the price of the stock breaks both sides i.e. towards the upper band as well as towards the lower band, then the such a situation is called a breakout. In such a situation, when the price of the stock moves towards the upper lines, then we call it overbought, whereas when the price of the stock moves towards the lower lines, we call it oversold. Let’s know about Bollinger Band and some of its important trading strategies, which you can use to ease your stock investment. Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. 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.

Trading within the bands

The standard setting for the Bollinger bands is 20 periods . This refers to the length of time over which the indicator is calculated from the price action. Categories fails brashly.This system is quite easy to follow and initiating trades solely based on this system is not recommended. I add some tit bits of price action along with this system, while using price action trading India markets. While to calculate the lower band, you have to calculate the moving average of the close and subtract the standard deviation from it.

It is our endeavour to provide quality content that can be in the form of videos or ebooks or articles which can help you become a better trader and also a better human being. As per author John Bollinger band works will in 20 days time interval. It helps to identify whether the stock is trading above average, below average or out of range bound. Each change in the price movement can indicate the change in the structure of Bollinger band. We have mentioned above some of the best strategies can could work with Bollinger bands. But trading within the bands is a low-risk, independent strategy that could be the most popular.

bollinger bands trading strategies

Breakout strategy can also be applied using squeeze pattern as discussed in the next point. Trade in stock market is high risk & high return and We do not accept any financial and/or legal responsibility arising the use of the information. This website does not guarantee of 100% accuracy or completeness of any information and is not responsible for any omissions.

If you come across any individual or organisation claiming to be part of Enrich Money and providing such services, kindly intimate us immediately. Stock brokers can accept securities as margins from clients only by way of pledge in the depository system w.e.f September 01, 2020. Update your e-mail and phone number with your stock broker / depository participant and receive OTP directly from depository on your e-mail and/or mobile number to create pledge. We are successfully altering the levels of extremes that the price has to go to break through them. The standard deviation has been adjusted to 1.9 in the chart below.

Bollinger band breakout

When market is volatile, the bands drift farther from moving average graph and contract when volatility decreases. Using Bollinger Bands trading strategy traders can predict when a stock is overbought or oversold. When stock price moves close to the upper band, it indicates overbuying.

Best Indications for Identifying Stock Market Top or Peak

The bands widen when there is a price increase and narrow when there is a price decrease. Due to their dynamic nature, Bollinger Bands can be applied to various securities trading. Because it is based on a 20-day simple moving average and two outer lines, the Bollinger band tool is a lagging indicator.

Once the second high is smaller than the first high and the second low is lower than the first low, it is time to start selling. Bollinger warns that prices breaking upper or lower limits don’t signal changing trends or give trading signals. Prices close to upper limit don’t indicate book per share bullish trends and vice versa. It happens when a stock price hits the high, slumps to shoot up again and fall, representing a prominent M pattern. The fact that the second-high fails to reach the upper band is a sign of waning momentum and indicates a trend reversal.

The most common ones are are Bollinger Bands squeeze and the fact the fact that stock price has a tendency to move towards the middle line in case of a sideways market. Developed by John A. Bollinger, Bollinger Bands is very important technical indicator used to gauge volatility of any stock. In technical analysis bollinger bands has a special role to play, it informs traders and investor about the overbought and oversold levels. If the price is near the upper Bollinger Band, it’s considered “overpriced” whereas if the is price near the lower Bollinger Band, it’s considered “discounted”. Bollinger bands can tell when the market is more volatile or less. The gaps between the bands from moving average line is a measurement of market volatility.

The Bollinger Bands strategy is commonly used to point out oversold market conditions. However, instances may occur when the strategy is correct, yet selling pressure continues. During these instances, it can be hard to determine when the selling pressure will end and therefore, a protection of sorts is needed for once there has been an acute decision to buy.

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