Bollinger bands is one of my favorite indicators for a very long time now because in my opinion is one of the best indicators out there. I have used different sources in order to gather as much information as possible and make these two articles as complete as possible. Bollinger Bands are applied directly to price charts, providing a gauge for how strong a trend is, and spotting potential bottoms and tops in stocks prices.
Band width fluctuates based on volatility; the ability for Bands to adapt to changing market conditions makes it a popular indicator amongst traders. To use Bollinger Bands effectively, we must understand how they work, their trading applications, and pitfalls. There are three lines that compose Bollinger Bands: A simple moving average middle band and an upper and lower band. These bands move with the price, widening or narrowing as volatility increases or decreases, respectively.
The position of the bands and how the price acts in relation to the bands provides information about how strong the trend is and potential bottom or topping signals. Bollinger Bands are used on all timeframes, such as daily, hourly or five-minute charts. Bollinger Bands have two adjustable settings: The Period is how many price bars are included in the Bollinger Band calculation. The number of periods used is often 20, but is adjusted to suit various trading styles. The Standard Deviation is typically set at 2.
The higher the Standard Deviation, the harder it will be for the price to reach the upper or lower band. Bollinger Bands denoted 20,2 means the Period and Standard Deviation are set to 20 and 2, respectively. The indicator is calculated using the following formula. Figure 1 shows how Bollinger Bands looks on a chart as they move and adapt with price. One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it.
After setting your Bollinger Bands to 2. At the same time, the meaning of such signals becomes much more important because it shows significant price extremes. There are two types of tops that you need to know about: The screenshot below shows both scenarios: I marked the second spike with an arrow — this was a trend continuation signal as price failed to break higher during the downtrend. The strong spike that was followed by a fast rejection showed that bulls lacked power.
In contrast to most other indicators, the Bollinger Bands are non-static indicators and they change their shape based on recent price action and accurately measure momentum and volatility. Thus, we can use the Bollinger Bands to analyze the strength of trends and get a lot of important information this way. There are just a few things you need to pay attention to when it comes to using Bollinger Bands to analyze trend strength: The screenshot below shows how much information a trader can pull from using Bollinger Bands alone.
Let me walk you through the points 1 to 5: This is a classic reversal pattern where the bearish trend strength faded.
The first swing high reached the outer band whereas the following two failed — fading strength. It tried to pull away, but bears were always in control. As you can see, the Bollinger Bands alone can provide a lot of information about trend strength and the balance between bulls and bears. During trends, the moving average holds very accurately and a break of that moving average is usually a meaningful signal that the sentiment has shifted.
The screenshot below shows nicely how price trended between the outer bands and the moving average both on the way up and down. During the trend, the moving average could have been used as a re-entry signal to add to existing positions during pullbacks. Furthermore, the moving average can be used as a trade exit signal where a trader does not close his existing positions unless price has broken the moving average.
By combining the Bollinger Bands with the moving average, a trader can already create a robust trading method. Together with the moving average and the RSI, Bollinger Bands make for a great foundation for a trading strategy. This is where we stop for this post. I hope it was useful to you! How do you use it? Fantastic coverage on Bollinger Bands, the rules are precise…I will sure diarize this part of your guide. John — Yes, from my experience I can say that we can rarely depend on a single indicator for reliable signals and make money in the long run.
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Education Educational Articles Forex Education. Good article, will save this guide for reference. Hi guys and thank you for the positive comments! Part two coming in a bit! Please enter your comment!
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