Bollinger Bands

BOLLINGER  BANDS

"Bollinger Bands" were invented by John Bollinger, and are designed to identify price volatility using "standard deviation" around a simple moving average. As the volatility changes, these bands contract and expand to give potential trade opportunities. 

"Bollinger bands" do not produce any Buy/Sell signals, however they help traders with other analysis techniques and indicators. The direction and width of "Bollinger Bands" (%B) provide good trading ideas.

One of the techniques in trading "Bollinger bands" is when a new high or low price trade outside a band and subsequent highs/lows are falling inside the band. This occurrence may signal a price or trend reversal.

Another important technique of "Bollinger bands" is to compare the Bollinger bandwidth (%B) at key price levels. These bands constrict and provide an early warning signal before a big price change.

Traders use multiple "Bollinger bands" on multiple time-frames along with other momentum indicators. "Bollinger bands" dynamically change and provide a constant feedback to the momentum regarding the price and the direction of the trends. 

"Bollinger bands" are also used with other indicators to find trade opportunities.

TRADING BOLLINGER BANDS

Trading Bollinger Bands

The example above illustrates a "Bollinger bands" trade setup from the Russell 2000 chart.

On January 23,2007, around 12.45 pm, the "Bollinger bands" expanded and made a new 20-bar high and pierced the bands outside of its price range. On subsequent highs, the price closed inside the bands to signal a potential trend reversal. 

At about 1.30 pm, the price reversed to test the lower bands. About 2.30 pm, the price made a 20-bar low and traded outside the bands. 

On subsequent trading, the price traded inside the bands to suggest a potential reversal to the upside. 

"Bollinger bands" trade setups can be traded along with other key technical indicator entry/exit signals.

TRADING BOLLINGER BANDS SQUEEZE

Trading Bollinger Bands Squeeze

"Bollinger Bands" provide excellent feedback as their shape changes along with the price changes. 

They provide an early warning about "volatility" contraction and expansion. 

When prices trade in a consolidation range, the bands constrict (squeeze) and provide an early signal about an impending sharp price change. 

Price expansion makes the bands expand outward and provide a volatile shape and suggest that prices may trade outside the bands until the "volatility" returns to the norm within the bands.

The example above shows GOOG price chart with "Bollinger Bands." In mid October 2005, the Bollinger bands contracted to suggest an impending move. After bands expansion, prices reached new highs. Trades are taken in the direction of the breakout from bands contraction.