How to Use Bollinger Bands
Momentum oscillators and moving averages are of little value during a consolidation because these indicators simply flatten along with price action. Instead, chartists should consider using volume-based indicators, such as the Accumulation Distribution Line, Chaikin Money Flow, the Money Flow Index (MFI) or On Balance Volume (OBV). Signs of accumulation increase the chances of an upside breakout, while signs of distribution increase the chances of a downside break.
Likewise, “relatively low” should not be considered bullish or as a buy signal. As with other indicators, Bollinger Bands are not meant to be used as a stand-alone tool. Chartists should bollinger bands tutorial combine Bollinger Bands with basic trend analysis and other indicators for confirmation. Chart 6 shows Air Products (APD) with a surge and close above the upper band in mid-July.
Overall, APD closed above the upper band at least five times over a four-month period. The indicator window shows the 10-period Commodity Channel Index (CCI).
Bollinger Bands® and Keltner Channels inform you when the market is transitioning from lowervolatility to higher volatility. Using these two indicators together is stronger than only using a single indicator, whereas both indicators should be used together. In this trading method, the MACD is used as a momentum indicator, filtering false breakouts. Bollinger Bands® are a type of chart indicator for technical analysis and have become widely used by traders in many markets, including stocks, futures, and currencies.
Because the Bollinger Band Squeeze does not provide any directional clues, chartists must use other aspects of technical analysis to anticipate or confirm a directional break. In addition to basic chart analysis, chartists can also apply complimentary indicators to look for signs of buying or selling pressure within the consolidation.
The upper 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 a technical indicatordeveloped by John Bollinger. The indicator forms a channel around the price movements of an asset.
First, notice that this is a strong surge that broke above two resistance levels. Trading turned flat in August and the 20-day SMA moved sideways. The Bollinger Bands narrowed, but APD did not close below the lower band.
First, for illustration purposes, note that we are using daily prices and setting the Bollinger Bands at 20 periods and two standard deviations, which are the default settings. These can be changed to suit one’s trading preferences or the characteristics of the underlying security.
For signals, Bollinger Bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend. Signals derived from narrowing BandWidth are discussed in the ChartSchool article on BandWidth.
As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather “tags”. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows https://forexarena.net/ 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.
Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands. As such, they can be used to determine if prices are relatively high or low. According to Bollinger, the bands should contain 88-89% of price action, which makes a move outside the bands significant.
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. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. In fact, dips below the 20-day SMA sometimes provide buying opportunities before the next tag of the upper band.
Developed by John Bollinger, Bollinger Bands® are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increases and contract when volatility decreases. Their dynamic nature allows them to be used on different securities with the standard settings.
Dips below -100 are deemed oversold and moves back above -100 signal the start of an oversold bounce (green dotted line). This is an example of combining Bollinger Bands with a momentum oscillator for trading signals.
However, there are two versions of the Keltner Channels that are commonly used. Admiral Keltner is possibly the best version of the indicator in the open market, as the bands are derived from the Average True Range (ATR).
In range-bound markets, mean reversion strategies can work well, as prices travel between the two bands like a bouncing ball. However, Bollinger Bands® don’t always give accurate buy and sell signals. During a strong trend, for example, the trader runs the risk of placing trades on the wrong side of the move because the indicator can flash overbought or oversold signals too soon.
Technically, prices are relatively high when above the upper band and relatively low when below the lower band. However, “relatively high” should not be regarded as bearish or as a sell signal.
The channels are based on standard deviations and a moving average. Bollinger bands can help you establish a trend’s direction, spot potential reversals and monitor volatility. All of this can help you make better trading bollinger bands decisions if you follow a few simple guidelines. With bothBollinger Bands®, Admiral Keltner, and the MACD indicators, you should use the default settings that are used on the vast majority of trading platforms.
Created by John Bollinger in the 1980s, the bands offer unique insights into price and volatility. In fact, there are a number of uses for Bollinger Bands®, such as determining overbought and oversold levels, as a trend following tool, and for meet the frugalwoods monitoring for breakouts. The 20-day simple moving average (X) that serves as the baseline for the Bollinger Bands® is in the centre of the zone. Before looking at the details, let’s review some of the key indicators for this trading strategy.
There are multiple uses for Bollinger Bands®, including using them for overbought and oversold trade signals. Traders can also add multiple bands, which helps highlight the strength of price moves. Another way to use the bands is to look for volatility contractions. These contractions are typically followed by significant price breakouts, ideally on large volume.