# Bollinger bands strategy

Bollinger bands strategy
Bollinger bands are one of the most popular technical indicators for traders in any financial market, if investors (FX) trading in shares, bonds and currency are. Many traders use Bollinger Bands to determine the levels of overbought and oversold to sell when the price touches the upper Bollinger band and buying when it hits the lower Bollinger band. In the area of related markets, this technique works well, as prices bounce travel between the two bands like balls, the walls of a racquetball court. However, Bollinger bands are not always accurate buy and sell signals. This is where to come to the exact Bollinger band "bands" Let's take a look.

Tutorial: Analysis Chart Patterns

The problem with Bollinger Bands
As John Bollinger is to identify for the first time, "the day of the bands are just that - tags, not signals of a button on the upper Bollinger band is not in itself a sell signal A day in the lower band Bollinger is not and .. a buy signal. "Prices can often" walk on the tape. "In these markets, traders who are constantly trying to" sell up "or" buy low "with a series of stop-outs atrocious face, or worse, a loss never move the mount Floating like the price further and further away from the original entry.

Perhaps a useful way to trade with Bollinger bands use them to assess trends. To understand why Bollinger bands may be a good tool for this task, we must first ask - what is a trend?

Trend deviance
A standard clichÃ© in trade is that prices for 80% of the time. How many clichÃ©s it contains a good amount of truth, since in most markets to consolidate the bulls and bears battle for supremacy. Market trends are rare, so it is not trade nearly as easy as it sounds. As for the price this way, we can then define trend as deviation from the norm (range).

Bollinger band formula consists of:

BULL = Upper Bollinger Band

Bold = Lower Bollinger Band

n = smoothing period

m = number of standard deviations (SD)

= Standard deviation of the last n periods typical price (TP) = (HI + LO + CL) / 3

BULL = MA (TP, n) + m * SD [TP, n]

Bold = MA (TP, n) - m * SD [TP, n]

At its core, Bollinger bands measure deviation. That's why they can be very useful for diagnosing trend. By producing two sets of Bollinger bands - one with the "standard deviation" and the other with the decor typical "two standard deviation" - we can look at prices in a whole new way.

In the following table, we see that if the channel in price between the Bollinger bands than one SD and two SD from the mean, the trend is up, so we can define this channel as a "neutral zone". Conversely, if the price channel in SD Bollinger bands -1 and -2 SD, it is in the "sell zone". Finally, if the course meanders between +1 and -1 SD SD band group is essentially in a neutral state, and we can say that it is in "the land without a man."

One advantage of other great bands Bollinger is to adapt dynamically to price expanding and contracting as volatility increases and decreases. Therefore, the bands widen and narrow, of course sync with price action, creating a very precise jacket on.

Bollinger band channels

Figure 1: Bollinger band channels show trends

After setting the ground rules for the Bollinger band "bands", we can now show look like this technological tool for both trend traders, the dynamics and fade traders who profit from the trend, such as operating depletion can be used. Back to map AUD / USD just mentioned, we can see how traders would likely long positions if the price of the "neutral zone". They would then be able to stay in vogue, such as the Bollinger band "bands" encapsulate most of the price action of the huge square pass.

What would be the logical stopping point? The answer is for each individual operator, but a reasonable possibility would be to close the long trade if the candle turned red and more than 75% of his body were under the "buy zone". With the 75% rule is obvious, because at that time clearly falls in the price trend, but why are sure that the candle is red? The reason for the second condition to remove the trend traders "wiggled out" of a trend by a rapid movement to the probative The downside to restart the "neutral zone" to prevent the end of the negotiation period. Note that remain in the table below the dealer is able to move with the trend of most holidays, when the course starts at the top of the new round of consolidation.

Figure 2: the Bollinger band "bands" contain the price action

Bollinger band "bands" can be used as a valuable tool for dealers, the trend exhaustion by picking up the tour price to be like. Note, however, requires the negotiating against the trend of much wider limits of error as trends will often capitulate several attempts before proceeding.

In the following table, we see that the trader melted using the Bollinger band "bands" are able to quickly diagnose the first sign of weakness trend. Once we drop the prices from the trend channel, fader may decide to use classic Bollinger bands by shorting the next tag of the upper band of Bollinger to do. But where the attack took? To put it just above the swing high will practically assure the trader of a stop-out price as often many probative forays to the top of the range, with buyers trying to extend the trend. This is where the volatility property of Bollinger Bands is a huge advantage for the dealer. By measuring the width of the "land without men" zone, which is simply the range from +1 to -1 SD from the mean, the dealer can offer a fast and projection area is very effective in front of him stopped on the market and prevent noise and protect capital if the trend accelerates really.

The Bottom Line
As one of the most popular indicators of technical analysis of the Bollinger bands are of crucial importance for many technically oriented traders. By extending the functionality through the use of the Bollinger band "bands", traders can achieve a higher level of analytical sophistication with this simple and elegant for both trends and strategies for fading.

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