Bollinger bands

Bollinger Bands

Bollinger Bands ® is a registered trademark of John Bollinger

Bollinger Bands

Bollinger Bands are probably one of the most important indicators ever developed for measuring price action volatility. You can use Bollinger Bands as a very accurate indicator within any time frame.  The indicator has many uses and can provide the smart trader with some extremely profitable entry and exit signals.

There are a few variations on how to use Bollinger Bands depending on market conditions.

The major 3 signals from Bollinger Bands are these:

  • The squeeze
  • The expansion
  • 2.0 STDV close

Of course these variations are often referred to by different titles and names but the overall concept is the same.

Bollinger Bands Measuring the Value of Over-sold or Over bought Securities

As a volatility measure, Bollinger band limits basically indicate whether an individual stock is over bought or over-sold.  However, they do not in and of themselves indicate a buy or sell signal. Bollinger Bands are actually indicators as to the volatility of a particular security. As a result, for trading purposes, one would want to look at the activity of trading within the Bands in conjunction with another tool, such as the Relative Strength Indicator, to properly undertake investment decisions.

Historically, when a price movement has been identified originating at one of the Bollinger limits, it will more likely than not continue at least to the opposite limit band. Bollinger Bands are in essence a graphic representation of the volatility that exists in the market for any particular stock. As such, they allow the investor the possibility to identify periods where opportunities for the undertaking of successful positions can arise.

When used in conjunction with other indicators, the knowledge and use of Bollinger Bands can greatly improve any individuals trading performance.

Bollinger Bands and Trading

Bollinger Bands is without a doubt one of the greatest tools ever created to aid the astute trader with his entries and exits.  The reaction of an upper or lower band to approaching price provides the active trader with a tale tale sign of what will likely take place over the next few bars or more.  This reaction provides valuable insight into whether or not this will be just a few bars or quite a few bars. Likewise the upper Bands “personality” during this time is also very telling.

Bollinger bandIn example A above notice how the lower band responds to price as it approaches. Look at example B as price approaches. Once continues a small trend while the other pierces and reverts to the mean. This reaction to approaching price is just the beginning of what Bollinger Bands will tell you. If you know what to look for with from both the upper and lower band, you are able to identify incredibly accurate entries as well as some rather perfect exits.

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The Details

Bollinger Bands provides about 3-4 clear and precise entry signals.  When you combine these Bollinger band signals with some solid price action techniques they can all develop into perfect entry triggers that will provide an unlimited supply of Bollinger band triggers.

Additionally when you develop an eye for understanding how both Bollinger Bands work together as a trade progresses you will discover a perfect tool for pinpointing perfect exits.

As the Bands move and expand and contract they provide a clear visual of what price is up too.  Its easier to see the constricting volatility and predict a possible expansion, and as well its much easier to see when price has made a dramatic move and its likely over.

Combine this with simple support and resistance levels and you have the beginnings of a very powerful trading system.

Just keep in mind when trading Bollinger Bands that you want to watch both bands as they react to approaching price action, not just the band that price is approaching.  In other words if price is approaching the upper band, make sure your looking at the upper and lower band to determine what might be taking place.  This will literally double your accuracy with Bollinger Band trading.