Bollinger Bands Example


Moreover, the price is out of the Bollinger Bands upper band, which is a rather rare situation. Applying the rule that we have previously mentioned, you can place a short order expecting the gap to be closed. We advise doing it once the price returns below the upper band of the BB indicator. The Bollinger Bands is a famous technical indicator created by John Bollinger, an equity trader from the US.

bands expand

A second drop in creates a lower low than the initial reaction low in condition 1 however; the second, new low does not break through the Lower Band. Another good example is using Bollinger Bands to confirm some classic chart patterns such as W-Bottoms. Bollinger often used Bollinger Bands to confirm the existence of W-Bottoms which are a classic chart pattern classified by Arthur Merrill. Discover the 10 most important lessons from 18 years of profitable trading & reading over 150 trading books.

The very first mention of a tool similar to Bollinger Bands dates back to 1960. Brokerage services in your country are provided by the Liteforex LTD Company (regulated by CySEC’s licence №093/08). The indicators used should not be directly related to one another. For example, you might use ‘one-momentum’ or ‘one-volume’ indicators successfully, but two-momentum indicators aren’t better than one. The Bollinger Bands provide a relative definition of high and low.

Overbought and Oversold Trading Strategy with Bollinger Bands

This can also be used to experiment with inputs to calculate the MA or the multiplier. At the next stage, we add up the list of data we have obtained. To get a non-zero result, we need to get rid of negative values ​​by squaring them.

  • For instance, the upper band is the profit target if the prices move off the lower band and then cross above the moving average.
  • This would indicate that the trader could go long, targeting the middle band.
  • For effective profitable trading, it is important to always be on alert and monitor the market situation.
  • I also made them solid and slightly thicker than the default.
  • The only condition is that there is no connection between the calculation of the Bollinger Bands and additional indicators.
  • They are plotted based on the percentage offset from the blue moving average.

In the 1980s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it. Unlike a percentage calculation from a normal moving average, Bollinger Bands® simply add and subtract a standard deviation calculation. 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 moving average is a technical analysis indicator that helps level price action by filtering out the noise from random price fluctuations. A Keltner Channel is a set of bands placed above and below an asset’s price.

Bollinger Bands, its trading strategy and examples explained

Bollinger bands are contained three lines – the upper, middle, and lower bands. The center band is a moving normal, and the expert picks its boundaries. The upper and lower bands are situated on one or the other side of the moving average. Some traders use Bollinger bands alongside other indicators to determine when to buy or sell.


To do this, click on the « » button at the top of the chart. Then, in the menu that opens, click on the « Bollinger Bands  » and « RSI » links. Please note that the BandWidth is at its lowest during this period. Click on the « Custom » item and select the name of the newly installed indicator. To add a Stochastic, click on the « Indicators » button in the upper part of the online terminal window.

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Additionally, the price broke above the midline to further justify the buy signal. The idea is to use daily charts, and when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase. There are various strategies involving the use of Bollinger Bands. Let’s unpack each strategy, so you can identify which one will work best with your trading style. Around 95% of all price action occurs between the upper and lower boundaries.

  • For this reason, the Bollinger Bands indicator is best utilized in conjunction with other indicators and technical analysis tools as part of a comprehensive trading strategy.
  • The Bollinger Bands is a famous technical indicator created by John Bollinger, an equity trader from the US.
  • However, just because the market is deemed cheap or expensive doesn’t automatically mean that you should enter or exit a trade right away.
  • The upper and lower bands are plotted on either side of the SMA line while standard deviations determine the distance between them.

W6, W7, W9, W11, W13, W15, M2, M4, M6, M8, M10, M11 are reversal formations. In order to read these signals correctly, you need to use additional indicators as filters. Knowing the standard deviation, we can calculate other points and draw the top line along them. To simplify the Bollinger Band calculation, you can use an Excel spreadsheet, which I will discuss below.

The Ultimate Bollinger Bands Trading Strategy

The cost then, at that point, pulls back towards the center band or lower and makes another cost high, yet doesn’t close over the upper band. Technical analysis is a trading strategy that analyzes statistical trends to identify trading opportunities. Approximately 90% of price action occurs between the two bands.

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When the price hits the upper band of the BB indicator, we have a signal that the trend is going to change. However, there is still no confirmation of the reverse if we use BB alone. You probably know that the Moving Average is sometimes used as a dynamic support/resistance level. When the price rejects the middle Moving Average of the BB indicator, we are going to enter the market. The easiest way to trade using the Bollinger Bands indicator is to buy when the stock in in the bottoms during its uptrend and to sell on tops during the downtrend. You can also draw a trend line to be sure that you are in the right direction.

Third, prices move above the prior high but fail to reach the upper band. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal. Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. John Bollinger has a set of 22 rules to follow when using the bands as a trading system. The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average and can be modified.

day moving average

It involves the use of three bands—one for the upper level, another for the lower level, and the third for the moving average. When prices move closer to the upper band, it indicates that the market may be overbought. Conversely, the market may be oversold when prices end up moving closer to the lower or bottom band.

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For example, the price may move above the upper band, then touch the band, then dip below it. This kind of pricing trend could suggest that a stock’s price momentum is beginning to lose steam and you may want to reconsider your position in it. The Bollinger Bands indicator can help you find excellent market entry and exit points.

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