What are Bollinger Bands?

This is a technical analysis tool used to identify the pits and peaks occurring in a trend. The bands are placed two standard deviations above and below from the 20-period moving average. The upper band illustrates the resistance line, the lower band the support line.

Bollinger bands are among the most reliable and effective indicators a trader can use. They can be used to read market signals and trend strength, and to plan entries during consolidations and find potential tops. Bands are among the dynamic indicators that adapt to changing market conditions, hence they show many advantages over other standard indicators, which sometimes lag behind.

What are the characteristics of Bollinger bands?

These are price channels that are plotted above and below price. The outer bands are based primarily on price volatility – they expand as prices fluctuate and the trend strengthens. They contract with turn during periods of consolidation and low momentum trends.

The base setting of the bands has a standard deviation at level of 2.0. However, many traders suggest that this range should be increased to level of 2.5, so as to make the bands wider and capture more price action. With a standard deviation value of 2.5, almost 99% of the price action covers a range of two bands, which means that the violation of the outer bands becomes a very significant signal.

Note that inside the Bollinger band is the 20-period moving average.

How to use Bollinger bands to speculate with the trend?

The Bollinger Band is not a static indicator. It changes its shape based on recent prices and the accuracy of measuring two variables – momentum and volatility. Therefore, we can use this indicator to analyze the strength of the trend and gain valuable information through it.

There are several important points that are worth noting in the context of analyzing the strength of the trend using the Bollinger Band. These are:

• Cyclic pushes toward the outer ribbon, which ultimately do not reach it, clearly indicating the lack of force,
• During strong trends, the price stays close to the outer band,
• Breaking the moving average is often a signal that indicates the end of a trend,
• Weakening of imaging torque by pulling back from outer ribbon,

Basics – finding optimal peaks and troughs

One of the most important elements of using the Bollinger strategy is skillful observation and catching signals. For this purpose, you can use the combination of Bollinger bands with the RSI indicator. In addition, it is worth observing two situations:

• The price is heading to the outer band, where it is rejected (reversal signal)
• After a move in the trend, the price does not reach the outer band when the trend becomes weaker. This signal is usually associated with divergence with RSI indications (continuation signal)

Summary

The Bollinger Band is a multi-faceted indicator that provides a lot of information about the trend and potential changes in the direction of movement. Together with the moving average and RSI, the Bollinger Band can be considered a solid foundation for a trading strategy.