Tales from the Trenches: A Simple Bollinger Band® Strategy

As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at /en-au/terms-and-policies/. Conversely, when the market makes lower lows, but the RSI is making a higher low – a bullish divergence – this is a sign of strength and indicates the market could bounce upward. The price hit the Bollinger Band, the RSI (when the price touches the bottom band) needs to be between 50 and 30.

This squeezing action of the Bollinger Band indicator often foreshadows a big move. This Bollinger Band width formula is simply (Upper Bollinger Band Value – Lower Bollinger Band Value) / Middle Bollinger Band Value (Simple moving average). To the earlier point, price penetration of the bands alone cannot be a reason to short or sell a stock. Above is an example of the double bottom outside of the lower band which generates an automatic rally.

Bollinger Bands trading strategy: A comprehensive guide for traders

Both of these work well, but in two very different types of markets. These other indications add more evidence of a potential Bollinger Bollinger bands strategy Band squeeze. Using the same chart from above, we can see that the rally off the first low created a near term overbought scenario.

Further moving of the stop order in the direction of the candlestick formation will give profit when triggered. In the next chart, the green oval marks an area where several candles in a row close below the lower band where we can identify the w bottoms, meaning that the %b will be less than 0. This can be both an oversold signal and a trend reversal signal. A little later, the Alligator lines cross, which confirms the trend change and lets us open a short position.

Best Indicator to use With Bollinger Bands Bounce Trading Strategy

The spacing between the lower, upper, and middle bands is determined by volatility. The upper and lower are two standard deviations below and above the moving average in the middle. In the chart, the blue middle band channel represents standard bands based on a 20-period moving average. The orange channel, in turn, was built on the basis of the 20-period EMA. As you can see, in times of high volatility, where the bands expand significantly, these methods give different results.

If a market is trading above its Bollinger band, you’d be looking for an overbought signal on the RSI. And if the market is below the bands, you’d be looking to confirm it with an oversold signal on the RSI. Bollinger bands are not suitable for a standalone strategy, they need to be combined with https://investmentsanalysis.info/ other indicators to make any informed decisions about price volatility. Something else you can consider is when the price touches the middle band. You can use price channels, trend lines, Fibonacci lines, to determine a trend. Find higher highs or lower lows and place a trend line on them.

What Are Bollinger Bands

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• So, it’s not something you can just pick up and use for buy and sell signals.
• The most well-known volatility channel is the Bollinger Band, though the Keltner Channel Indicator is another effective type as well.
• At the same time, Alligator does not show any crossings between its lines (in a blue circle), which indicates an early sign of an overbought asset and a possible trend change.
• In this case, it will be a signal either about an overbought asset, or about a change from a bearish to a bullish trend.
• In terms of volatility, Bollinger bands are able to show when volatility is reaching extreme lows, relative to the asset’s recent history.
• The indicator window shows Chaikin Money Flow weakening in March and turning negative in April.

To simplify the calculations, let’s take a period of 10 bars. After selecting the multiplier and the period, you can calculate the Bollinger bands themselves. 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. As a result, after adding up, we get the average absolute deviation.

The Basic Understanding of Bollinger Bands

Bollinger Bands use standard deviation in its computation, and applying it as a momentum tool allows traders to trade using the concept of mean reversion. The Bollinger Bands is a powerful indicator that delivers multiple trading signals for traders in the market. Most traders utilise it for market analysis, as a volatility channel, as well as a momentum tool. As a volatility channel, traders watch the upper and lower bands for volatility cues in the market. Particularly, traders watch for the Bollinger Bands squeeze, which occurs when both the upper and lower bands converge or come together, especially after a trending period.

This would be the last time that Yahoo tested the lower band as it marched upward toward the upper band. Following the strategy, technical traders would enter their buy orders for NYX on June 13. Instead, it is sometimes wise to measure the width of the “no man’s land” area (distance between +1 and –1 SD) and add it to the upper band. By using the volatility of the market to help set a stop-loss level, the trader avoids getting stopped out and is able to remain in the short trade once the price starts declining. To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend.