Bollinger Bands

Introduction:

Bollinger Bands are a Technical Trading tool created by John Bollinger in the early 1980s. Bollinger bands are probably one of the most important indicators ever developed for measuring price action volatility. You can use to achieve near perfect entry and exit consistently. There are a few variations on how to use Bollinger bands depending on market conditions.

You can use Bollinger bands as a very accurate indicator within any time frame.

Bollinger Bands Basic:

Bollinger Bands are a way to display volatility and relative overbought and oversold price levels over a specific period. The three parts are commonly labeled as a Center line, Upper band and Lower band. The center line is usually a simple moving average, while the upper and lower bands are simply the centerline with a standard deviation added or subtracted.

The standard settings for the Bollinger Band are a 20-day simple moving average for the center, with a 2 standard deviation set for the outer bands. There is no best setting, but when developed the (20, 2) setting were used by John Bollinger, and will work for most stock charts.

How to trade with Bollinger band

The candlesticks present represent current approaching price action to the upper band or lower band. Lets start with number 1 to number 8, one by one.

1. Extremely bearish, price is falling to a lower band and the KEY is of course watching both the upper and lower band as price approaches. In this case the upper is rising while the lower is falling indicating not only a potential explosion in price but one to the downside is extremely likely.
2. Extremely bullish, price is rising to the upper band and the KEY is keeping a watchful eye on BOTH band as price approaches. In this case the upper band heads UP and the lower band falls, indicating a potential price explosion to the upside.
3. Price approaches the lower band while the upper and lower band remain flat. This is very insignificant and should be ignored unless things change.
4. Price approaches the upper band while the upper and lower bands remain flat. This is also insignificant and best left for the amateurs to enter.
5. Bearish candlestick at a lower band while band constrict - this is a sign that price is likely at least for now going nowhere. Wait do not enter.
6. Same here, a bullish candlestick at the upper band while the bands are constricting is a sign that not much is about to happen just yet.
7. Like number 1 this is a sign that price is going to make a nice move but the lack of the upper band hooking up indicates that the move for now won't necessarily be explosive.
8. Also similar to its counterpart in that price will likely move but not to the explosive level that would be expedited if the lower band was hooking downward.  The lack of the lower band hooking down limits the potential move here.

Conclusions

Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands. As such, they can be used to determine if prices are relatively high or low. According to Bollinger, the bands should contain 85-90% of price action, which makes a move outside the bands significant. Technically, prices are relatively high when above the upper band and relatively low when below the lower band. However, relatively high should not be regarded as bearish or as a sell signal. Likewise, relatively low should not be considered bullish or as a buy signal. Prices are high or low for a reason. As with other indicators, Bollinger Bands are not meant to be used as a stand alone tool. Chartists should combine Bollinger Bands with basic trend analysis and other indicators for confirmation. So, Bollinger bands is a very accurate indicator within any time frame.

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