Three Ways to Increase Profits with Bollinger Bands   

Bollinger bands are one of the simplest and easiest indicators that can be used to improve trading results in any market. 

Developed by John Bollinger, Bollinger bands have become one of the most popular technical indicators used by successful investors. 

These bands are, in essence, volatility limit indicators plotted and graphed on each side of a moving average. 

They're calculated by using the standard deviation of the price movements that have occurred during the moving average period under consideration. 

With moving averages are the underlying trend indicators, the bands created in Bollinger's method allow the individual investor to view the volatility of the investment under consideration. 

The distance, as represented between the lower and upper bands, reflect the standard deviation of the price movements or volatility. 

As activity becomes more volatile, the band expands further away from the moving average, and conversely, contracts towards moving average during periods of lesser volatility. 

Bollinger bands can be used in various ways, but are particularly accommodating for the following three reasons: 

Strategy #1: They help to identify new trends. 

One of the more outstanding strategies in producing profits is to take positions after a price breakout has occurred from a preceding period of relative stagnant range trading. 

Such a period would be characterized by low volatility or narrow Bollinger bands.   

Thus, for an individual investor, when he or she has identified a breakout through the use of Bollinger bands, it is a high probability event that a new trend is about to establish itself, and therefore, represents an opportunity to undertake a profitable trade. 

Strategy #2: They improve trading timing. 

Within any existing long term trend that has clearly delineated itself on a historical price chart, Bollinger bands can be extremely helpful in determining entry into the market to maximize investment returns.   

In any strong bull or bear market, it can be seen that during a longer trend, prices will often show corrections that revert back to the moving average. 

Consequently, in any strong trending market, retracements from the upper or lower bands to the center moving average represent ideal opportunities for undertaking a position in the direction of the longer term underlying trend. 

Strategy #3: They help in identifying market bottoms and tops. 

More likely than not, it can be observed that when prices reached the upper limits or lower limits represented by the Bollinger bands, they retrace themselves to the fair value represented by the moving average. 

As a result, these band levels represent high probability situations in which to profit from retracements. 

Bollinger bands, in essence, measure the volatility of price movements for any market investment at a particular point in time.  They are one of many indicators that can be successfully utilized for profitable trading. 

On a stand-alone basis, it is never recommended to use only one available tool for investment decisions, and Bollinger bands are no exception. They are most effective when used in conjunction with other indicators that confirm an investor’s identified opportunities.

When used in this fashion, they offer the individual the possibility to obtain exceptional returns on his or her capital.