How to Use Bollinger Bands
Create a Winning Strategy: For the 30th anniversary of Bollinger Bands, John Bollinger held a special two-day seminar teaching how to use his Bollinger Bands and which indicators to use for confirmation. I write this not to discredit or credit trading with bands, just to inform you of how bands are perceived in the trading community. For this lesson, as you learn about these indicators, think of each as a new tool that you can add to that toolbox of yours.
What is a 'Bollinger Band®'
When the bands lie close together, a period of low volatility is indicated. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline.
If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In , Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.
Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results. A paper from uses Bollinger Bands to reduce variance in a Monte Carlo simulation used to forecast the Canadian treasury bill yield curve.
In , Butler et al. Their results indicated that by tuning the parameters to a particular asset for a particular market environment, the out-of-sample trading signals were improved compared to the default parameters.
Companies like Forbes suggest that the use of Bollinger Bands is a simple and often an effective strategy but stop-loss orders should be used to mitigate losses from market pressure. Security price returns have no known statistical distribution , normal or otherwise; they are known to have fat tails , compared to a normal distribution. Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices.
Just the opposite is true; it is well recognized by practitioners that such price series are very commonly serially correlated [ citation needed ] —that is, each price will be closely related to its ancestor "most of the time". Adjusting for serial correlation is the purpose of moving standard deviations , which use deviations from the moving average , but the possibility remains of high order price autocorrelation not accounted for by simple differencing from the moving average.
For such reasons, it is incorrect to assume that the long-term percentage of the data that will be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount. Practitioners may also use related measures such as the Keltner channels , or the related Stoller average range channels, which base their band widths on different measures of price volatility, such as the difference between daily high and low prices, rather than on standard deviation.
This intraday strategy picks tops and bottoms based on a clear recovery following an extreme move. Find entry or exit signals or develop a complete system based on average true range.
Learn how traders can use "the usual suspects" standard for trend trading when it comes to choosing indicators for commodities investing. As we move into September, technology is back to being the hottest sector on Wall Street. Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility Learn more about how to identify buy and sell trading signals when implementing a moving average crossover strategy with Historical volatility is a long-term assessment of risk.
Here's how to calculate it in Excel. Find out about a common strategy that traders use with the volume-weighted average price, including the use of VWAP with See why the statistical concept of moving averages plays a central role for traders and chartists who rely on technical analysis Learn about some of the inherent limitations and possible misapplications of moving average analysis within technical stock When the market is quiet, the bands contract and when the market is LOUD, the bands expand.
Notice on the chart below that when price is quiet, the bands are close together. When price moves up, the bands spread apart. One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. If you said down, then you are correct! As you can see, the price settled back down towards the middle area of the bands. What you just saw was a classic Bollinger Bounce. The reason these bounces occur is because Bollinger bands act like dynamic support and resistance levels.