What Are Bollinger Bands? The Best Bollinger Bands Trading Strategies

Read on tolearn these Bollinger Bands trading strategies, what Bollinger Bands are, and how to use them. In conclusion, it is important to note that Bollinger Bands are just one part of trading. A trader needs to put into consideration a number of issues such as the overall market environment.

It is possible to use the upper and lower bands to help identify a potential reversal in price. When the daily range is entirely outside a broad set of Bollinger Bands, this suggests the increased likelihood of a reversal. As part of this breakout, the market could also quickly trade entirely outside the recently broadening set of Bollinger Bands. Chart 2 shows Nordstrom with a W-Bottom in January-February 2010. First, the stock formed a reaction low in January and broke below the lower band.

You need to identify those zones manually with your preferred method. If the price is in an uptrend, and continually hitting the upper band , when the price hits the lower band it could signal that a reversal has commenced. If the price rallies again, it likely won’t be able to reach the upper band or the recent price high. When the price is in a strong uptrend it shouldn’t touch the lower band. When the priceis in a strong uptrend it will typically touch or run along the upper band during impulse waves higher.

bollinger band reversal

Like Bollinger Bands, Stochastic indicators can help traders identify overbought and oversold levels. This image shows the location of the Bollinger Band relative to the normal curve. In our examples, these are 20-day averages and a standard deviation of 2. When using the bands, this would be described as Bollinger bands .

Day Trading With Bollinger Bands

Note, however, that counter-trend trading requires far larger margins of error, as trends will often make several attempts at continuation before reversing. At the core, Bollinger Bands® measure deviation, which is why the indicator can be very helpful in diagnosing trend. To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend.

At the end of the day, bands are a means for measuring volatility. So, it’s not something you can just pick up and use for buy and sell signals. It immediately reversed with an engulfing candle pattern, and all the breakout traders were head-faked. Along these lines, you don’t have to squeeze every penny out of a trade. Wait for some confirmation of the breakout and then go with it. If you are right, it will go much further in your direction.

Indicators to combine with Bollinger Bands

In trading, market participants use two contrasting types of analysis. Fundamental analysis examines market news, economic/social/political forces, and earnings data to predict how an asset’s price will move. Technical analysis, on the other hand, uses charts and various technical indicators to forecast market conditions. Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Setups like these don’t occur every day, but you can probably spot them a few times a week if you are looking at a 15-minute chart. If the candles start to break out above the TOP band, then the move will usually continue to go UP. Instead, look for these conditions when the bands are stable or even contracting. One thing you should know about Bollinger Bands is that theprice tends to return to the middle of the bands.

bollinger band reversal

It can help you stay on the right side of trend and spot potential reversals. For that, you’ll need to set up the indicators so they align with the guidelines discussed above. Random or default setting on the indicator may itrader review not work well. Adjust the indicator, and test it out with paper trades before using the indicator for live trades. Bollinger bands are technical indicators that form a channel around the price movements of an asset.

Bollinger Bands Forex Trend Reversals

Observe how the candlesticks closed below the Band as it pushed lower. This candlestick closed below both the trend line and the Lower Band Line. For instance, look for a volume surge that implies a weak market ready to reverse. Many cases of price the history of forex leaping beyond the Bollinger Bands are also exhaustion gaps. Hence, you can apply the same rules of analysis you use for trading exhaustion gaps. Hence, Bollinger Bands expand and contract according to the standard deviation of past price action.

Like any other trade signal, you will need to exit your position without reservation. You could argue that you don’t need the bands to execute this strategy. However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands. In the above example, simply buy when a stock tests the low end of its range and the lower band.

The key to this strategy is a stock having a clearly defined trading range. This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far. However, from experience, the traders that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. The key to this strategy is waiting on a test of the mid-line before entering the position. You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend and there is a sizable amount of volatility. This strategy is for those of us who like to ask for very little from the markets.

Stochastic indicator

If a currency normally follows a range pattern, this method will be useful. However, mistakes can cause huge losses, such as when a breakout occurs. The breakout trade works best in a market where the price has repeatedly hit the upper or lower Bollinger Band over an extended period without moving out of the range completely. Trading based only on signals generated by the various Bollinger Bands Forex strategies usually fails to provide sustainable profits. However, if these strategies are used together with other indicators or methods of analysis, they can work as the core of a profitable trading strategy.

How do you predict trend reversal?

  1. Identifying weakness in the trending move.
  2. Identifying strength in the retracement move.
  3. A break of key Support or Resistance.
  4. A break of long-term trendline.
  5. The price is coming into higher timeframe structure.
  6. The price is overextended.
  7. The price goes parabolic.

The indicator filled a need to visualize changes in volatility. Bollinger Bands were created in the early 1980s by trader, analyst, and formax prime teacher John Bollinger. From basic trading terms to trading jargon, you can find the explanation for a long list of trading terms here.

Conclusion: Reading Price Action With Bollinger Bands

Practically all charting packages include a Bollinger Bands indicator. It is also prudent for one to use a combination of indicators when making an investment decision. The chart below shows the VWAP indicator and BB applied on the 15-minute chart of the EUR/USD. The chart below shows the EURUSD with Keltner Channels and BB.

How do you reverse Bollinger Bands?

  1. Add a Bollinger Band® indicator (20 period, 2 standard deviation) to the chart – usually daily or hourly.
  2. Identify preceding uptrend/downtrend using price action or technical indicators.
  3. Isolate a double top/bottom, depending on the preceding trend.

Chart 3 shows Sandisk with a smaller W-Bottom in July-August 2009. Bollinger Bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend. Signals based on the distance between the upper and lower band, including the popular Bollinger Band Squeeze, are identified using the related Bollinger BandWidth indicator.

Bollinger Bands were created in the 1980s by financial analyst John Bollinger, and they measure price action and volatility. DTTW™ is proud to be the lead sponsor of TraderTV.LIVE™, the fastest-growing day trading channel on YouTube. For example, you could use the two in trend following and to find reversals. The difference between the two is that Keltner channels use the Average True Range during its calculation while Bollinger Bands uses standard deviation. Ideally, you can predict when a breakout is about to happen by looking at the formation of the Bollinger Bands.

The channels are based on standard deviations and a moving average. Bollinger bands can help you establish a trend’s direction, spot potential reversals, and monitor volatility. They can help you make better trading decisions if you follow a few simple guidelines. Hi Galen…Me again, Ron….I have tried again and again in the past to get my arms around BB’s, (as well as Keltner Bands et al.) to no avail. Bottom line they are all based on moving averages, which, as we all know, are “lagging” indicators.

During an uptrend, if the price is moving strongly then pullback lows will typically occur near or above the moving average line. The pullback doesn’t have to stall out near the middle line, but it does show strength if it does. Whereas in a Bollinger Bands squeeze, the market doesn’t swing up and down because the price action gets really tight and the candles are overlapping one another.

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Charles has taught at a number of institutions including Goldman Sachs, Morgan Stanley, Societe Generale, and many more. Deemed authorized and regulated by the Financial Conduct Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Some prefer to connect the top or bottom of the price to determine the upper or lower extremes. And then, they extend parallel lines to illustrate the interval of price changes. Libertex MetaTrader 4 trading platform The #1 professional trading platform.

A simple moving average is used because the standard deviation formula also uses a simple moving average. The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band. Most technical traders aim to profit from the strong uptrends before a reversal occurs. Once a stock fails to reach a new peak, traders tend to sell the asset at this point to avoid incurring losses from a reversed trend.