Traders use Bollinger Bands to identify breakouts by looking for breaks above the upper band on fundamental news and strong volume, following periods of low volatility. Bollinger Bands are a technical tool derived solely from the price action of an asset. They can be adjusted based on traders' inputs according to their time frames and risk profiles.
However, the standard inputs are a day moving average with a standard deviation of two. Standard inputs create an upper and lower band with prices trading within the bands, for the most part. The bands expand or contract in response to the volatility of the asset. One postulate of markets neatly captured by Bollinger Bands is that range expansion is followed by volatility contraction and volatility expansion is followed by range expansion. This is an important ingredient in using Bollinger Bands to identify breakouts, as they are more likely to be meaningful during periods of volatility contraction when the bands begin to pinch together.
Of course, it is possible to have breakouts while the spread between the bands is widening, but there are greater chances the breakout fails and the price action is a function of volatility rather than demand. Breakouts above the upper band while the bands are contracting should also be confirmed by volume and some positive news such as a strong earnings report or developments that imply earnings growth in the near future.
Expanding volume on a breakout is a sign traders are voting with their money that the breakout will continue. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. By Investopedia June 15, — 9: Volatility Standard inputs create an upper and lower band with prices trading within the bands, for the most part.
Volume Breakouts above the upper band while the bands are contracting should also be confirmed by volume and some positive news such as a strong earnings report or developments that imply earnings growth in the near future.
Learn more about Bollinger Bands, a tool based on standard deviations of moving average that can be applied to both high Learn about different strategies using Bollinger Bands, and understand how the Bollinger Band is calculated using standard Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility Learn about John Bollinger and his widely followed indicator, Bollinger Bands.
Explore how traders interpret the different Discover the logic behind using Bollinger Bands as a measure of price volatility for a security, and how the bands adapt Read about the differences between how Bollinger Bands and moving average envelopes are constructed and what that means for Learn how Bollinger's "squeeze" can help you determine breakout direction.
This strategy has become one of the most useful tools for spotlighting extreme short-term price moves. In the s, John Bollinger developed the technique of using a moving average with two trading bands above and below it.
Learn how this indicator works, and how you can apply it to your trading. Learn to pounce on the opportunity that arises when other traders run and hide. Trading range breakouts is unprofitable for most novice traders; here are some alternatives that can be used. Sometimes you have to be a predator to profit. Find out how to cash in on false breakouts. The shale band refers to a price level at which most North American A currency system that establishes a trading range that a currency's A price movement through an identified level of support or resistance, A conflict of interest inherent in any relationship where one party is expected to act in another's best interests.
Passive investing is an investment strategy that limits buying and selling actions. Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Get Free Newsletters Newsletters.More...