Bollinger Bands ® Explained – The Best Trading Indicator

Bollinger Bands are a technical indicator that measures volatility. They consists of a center line and two outer bands. As the price action becomes more volatile, the outer bands move away from the center line simple moving .

Just as a reminder, the middle band is set as a period simple moving average in many charting applications. However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands. Bollinger Bands are a technical trading tool created by John Bollinger in the early s. On December 26, Yahoo again tested the lower band, but did not close below it.

Bollinger Bands

Bollinger Bands are a technical indicator that measures volatility. They consists of a center line and two outer bands. As the price action becomes more volatile, the outer bands move away from the center line simple moving .

In a different example, Yahoo broke the lower band on December 20, The strategy called for an immediate buy of the stock the next trading day. Just like in the previous example, there was still selling pressure on the stock. While everyone else was selling, the strategy calls for a buy. That proved correct, as Yahoo soon turned around.

On December 26, Yahoo again tested the lower band, but did not close below it. This would be the last time that Yahoo tested the lower band as it marched upward toward the upper band. As we all know, every strategy has its drawbacks and this one is definitely no exception. In the following examples, we'll demonstrate the limitations of this strategy and what can happen when things do not work out as planned.

When the strategy is incorrect, the bands are still broken and you'll find that the price continues its decline as it rides the band downward. Unfortunately, the price does not rebound as quickly, which can result in significant losses. In the long run, the strategy is often correct, but most traders will not be able to withstand the declines that can occur before the correction. The selling pressure was clearly in oversold territory.

The strategy called for a buy on the stock the next trading day. Like the previous examples, the next trading day was a down day; this one was a bit unusual in that the selling pressure caused the stock to go down heavily. The selling continued well past the day the stock was purchased and the stock continued to close below the lower band for the next four trading days.

Finally, on March 5, the selling pressure was over and the stock turned around and headed back toward the middle band. Unfortunately, by this time the damage was done. The strategy calls for buying Apple shares on December The next day, the stock made a move to the downside. This is case where the selling continued in the face of clear oversold territory.

During the selloff there was no way to know when it would end. There are times, however, when the strategy is correct, but the selling pressure continues. During these conditions, there is no way of knowing when the selling pressure will end. Therefore, a protection needs to be in place once the decision to buy has been made. The strategy correctly got us into that trade. Both Apple and IBM were different because they did not break the lower band and rebound.

Instead, they succumbed to further selling pressure and rode the lower band down. This can often be very costly. In the end, both Apple and IBM did turn around and this proved that the strategy is correct. The best strategy to protect us from a trade that will continue to ride the band lower is to use stop-loss orders. This special strategy teaches you: We also have training for the ADX Indicator.

Bollinger Bands are well known in the trading community. They were created by John Bollinger in the early s. The purpose of these bands is to give you a relative definition of high and low. So in theory, the prices are high at the upper band and then are low at the lower band. Bollinger bands include three different lines. The upper, middle, and lower band. The middle band basically serves as a base for both the upper and lower.

They are mainly used when determining when there are overbought or oversold levels. Selling when the price touches the upper band and buying when the price touches the lower band. The spacing in between the lower, upper, and the middle band is determined by volatility. The middle band consists of a 20 period moving average, while the upper and lower are two standard deviations below and above the moving average in the middle.

All standard deviation means is that it is a statistical measure that offers a great reflection of the price volatility. When you see the band widen that simply means that there is volatility at that time. When the price moves very little, the band will narrow which means that there is little volatility. I prefer to use this trading strategy using the 1 hour or 4 hour time chart. After examining the picture, it may seem wise to buy every time the price hits the lower band or sell every time the price hits the upper band.

This can technically work, but is a risky way of trading using the Bollinger Bands. Sometimes strong trends will ride these bands and end up stopping out many unfortunate traders who used that method.

Also read the way bankers trade in forex market. The RSI indicator is used in this strategy to see how the currency is weakening or strengthening. Tap here for another RSI trading strategy article. These indicators should come standard on your trading platform.

There is no need to adjust these, as we will use the default settings. Here You can learn on How to fade the momentum in Forex Trading. The only element would suggest performing before you start, is to draw a horizontal line on the You will find out exactly why soon.

The rules are the same concept only the exact opposite for a SELL trade. The currency is in an uptrend and then it will pull back to the lower Bollinger Band. From there, if it follows the rules, we will execute a trade.

Finding a trending market is very simple. You can use channels, trend lines, Fibonacci lines, to determine a trend. Find higher highs or lower lows and place a trend line on them.

If the line is going up it is an uptrend, if its going down, it is a downtrend. It needs to be trending up or down, not a sideways trend. As you can see in the example that price came all the way back down, from the uptrend, and touched the bottom band. The price hit the Bollinger band, the RSI when the price touches the bottom band needs to be in between 50 and You want to see the RSI go up, in this case, in the direction of the trade.

Remember that it should be in between the mark. In a sell trade the RSI would need to be in between the mark and going downward. You need to see that the trend is moving upwards, in this case, before you enter a trade. If the candlesticks are moving to a point where it is making a new low, this would not be a good time to enter a trade. However, once the candles fail to make a new a low watch to see if it forms a bullish formation.

Here is an example of master candle setup. In this example, I bumped down to a one hour chart to make an entry. This is perfectly fine to do.

This could give you a more accurate place to make an entry point. As I said, the 4 hour and 1-minute time frames are the preferred time frames for this strategy. Yes, there is less of an opportunity for a trade, but the signals are very strong when you are in a higher time frame.

Always remember to be placing a stop loss, and having a good target area. With this strategy, we recommend using a pip stop. The Bollinger bands are a great indicator to use in any market. When you combine these with the RSI indicator, it should give you great entry points. Here is another strategy called trading volume in forex. Something else you can consider is when the price touches the middle band you can make a second entry to press your winners.

This can potentially give you double the profit. With this strategy, we only use the one trade that we initially make, but if your rules allow you to make multiple trades at a time with the same currency pair, then adding a second position at the middle line may be something you would want to consider.