How to Use Bollinger Bands

Let’s compare trading to home construction.

You wouldn’t pound a screw, would you? You wouldn’t even use a buzz saw to drive nails in.

There is a tool for every situation.

Certain technical indicators, like those employed in trading, are best suited to specific environments or scenarios.

As a result, the more tools you have, the more you will be able to ADAPT to the ever-changing market environment.

It’s also fine if you want to concentrate on a few specialized trading settings or tools.

When building electricity or plumbing in a home, it’s a good idea to hire a specialist, just as it’s nice to be a Bollinger Bands or Moving Average expert.

There are a million different methods to get your hands on some pips!

As you learn about these signs in this course, consider each one as a new tool to add to your toolbox.

You may not use all of these tools, but it’s always nice to have a variety of options, right?

You might even come upon one that you understand and are comfortable with enough to learn on your own. Now, enough with the tools!

Let’s get this party started!

Bollinger Bands

Bollinger Bands are a technical indicator created by John Bollinger that is used to assess market volatility and indicate “overbought” or “oversold” scenarios.

Basically, this handy little gadget tells us whether the market is silent or LOUD!

When the market is quiet, the bands shrink; when the market is LOUD, the bands expand.

Examine the graph. The Bollinger Bands (BB) indicator is a chart overlay indicator, which means it appears over the price. When the price remains stable, the bands are close together. When the price rises, the bands separate.

The upper and lower bands measure volatility or the degree to which prices vary over time.

Bollinger Bands automatically respond to changing market conditions because they gauge volatility.

What are Bollinger Bands?

Bollinger Bands are typically plotted as three lines:

1. An upper band
2. A middle line
3. A lower band
The indicator’s main line is a simple moving average (SMA).
Most charting systems default to a 20-period moving average, which is plenty for most traders, but you can experiment with alternative moving average lengths once you’ve gained some expertise using Bollinger Bands.
By default, the upper and lower bands represent two standard deviations above and below the middle line (moving average).
If you’re panicking because you’re unfamiliar with standard deviations.
Don’t be afraid.
The concept of standard deviation (SD) is simply a measure of how evenly distributed numbers are.
If the upper and lower bands are 1 standard deviation apart, this suggests that around 68% of recent price movements are CONTAINED inside these limits.

If the upper and lower bands are separated by two standard deviations, then approximately 95% of current price movements are CONTAINED inside these limits.

As can be seen, the higher the SD value used for the bands, the more prices the bands “catch.”

Once you’ve figured out how the bands function, you can experiment with different standard deviations.

To be honest, you don’t need to know most of this to get started. We believe it is more vital to demonstrate how you can use the Bollinger Bands in your trade.

Note: If you truly want to learn about Bollinger Bands calculations, read John’s book, Bollinger on Bollinger Bands.

The Bollinger Bounce

One thing to keep in mind concerning Bollinger Bands is that the price usually returns to the centre of the bands.

That is the whole point of the “Bollinger Bounce.”

Can you predict where the price will go next based on the chart?

You are correct if you said down! As you can see, the price has returned to the middle of the bands. You just seen a typical Bollinger Bounce. These bounces occur because the Bollinger bands operate as dynamic support and resistance levels.

The stronger these bands tend to be the longer the time frame.

Many traders have devised systems that thrive on these bounces, and this method works best when the market is fluctuating with no apparent trend.

You should only use this strategy when prices are trendless. So keep the WIDTH of the bands in mind.

Avoid trading the Bollinger Bounce when the bands are expanding because this usually indicates that the price is going in a TREND rather than a range!

Look for these conditions instead when the bands are stable or even contracting.

Now consider how to use Bollinger Bands while the market is TRENDING.

Bollinger Squeeze

The term “Bollinger Squeeze” is self-explanatory. When the bands congregate, it usually indicates that a breakup is imminent.

If the candles begin to break out above the TOP band, the move is likely to continue upward.

If the candles begin to break out below the BOTTOM band, the price will typically continue to fall.

The bands can be seen squeezing together in the chart above. The price has only recently begun to break out of the upper band. What do you think the price will be based on this information?

If you said up, you are correct once more!

This is the basic operation of a Bollinger Squeeze.

This method is intended to help you catch a move as soon as feasible.

These types of setups don’t happen every day, but you can definitely see them a few times a week if you look at a 15-minute chart.

There are plenty additional things you can do with Bollinger Bands, but these are the two most frequent tactics.

Add the indicator to your charts and observe how prices fluctuate in relation to the three bands. Once you’ve mastered it, experiment with adjusting some of the indicator’s parameters.