Bollinger Bands are the most reliable and dominant trading indicators on which traders can rely. The purpose of these indicators is to indicate trade strength, arrange entries according to the market range, and search for potential market tops. They never show lagging as they can get adjusted to the prices of real-time. These indicators also utilize volatility to work according to the current environment.
To know more details about BB Bands and how to use Bollinger Bands to improve your chart reading skills, keep reading this article!
You might wonder to know what are Bollinger Bands. The name depicts that BB Bands are price channels that are developed to indicate below and above prices.
The price volatility affects the outer BB bands. It tells when the price fluctuates; the Bands get expanded and become a strong trend. However, these Bands only contract when there is low momentum and sideways consolidation.
The default setting of Bollinger Bands is at the 2.0 standard deviation. It means that all of the price actions will occur between the channels.
For the center of the BB Bands, the moving average is 20-period, which is a great addition to the volatility-based outer Bands.
Trend-Trading With The Bollinger Bands
There is no lagging in Bollinger Bands as they automatically change with the price change. BB Bands are utilized for determining the strengths of trends, and thus, important information is collected.
Hence, to analyze the trend strength by using the Bollinger Bands, you need to understand the following aspects:
- Prices are closer to the outer bands during the strong trends.
- The fading moment is shown when the prices pull away from the outer bands.
- Lack of power is shown when repeated pushes are done into the outer bands because they don’t reach the bands.
Discovering Tops And Bottoms With Bollinger Bands
The best option is to combine the Bollinger Bands with the RSI indicator. These two make the perfect match. There are two different tops that you need to know about:
- When a trend moves, the price fails to reach out to the outer Band because the uptrend becomes weaker. This signal is majorly accompanied by the RSI divergence.
- Meanwhile, in a consolidation, prices get high into the outer Bands that immediately get rejected.
What Does Bollinger Bands Tell You?
- When the price is trading above the upper Bollinger Band, it is expected that selling pressure or profit booking will emerge.
- The stock trend is indicated by the simple 20-day moving average. But, the price above 20-SMA indicates a positive bias and vice-versa.
- The breakout is in the formation phase when the BB Bands squeezes.
- When the opposite bands start turning, the trend is said to be changing. In the bullish market, it is observed when the lower Band starts turning upwards, profit booking is obtained.
- Bollinger Bands also tell that the prices will always trade between the upper bands and lower bands. Whenever it is observed that the prices have gone beyond any of the bands, it becomes necessary to retrace them with the bands’ range.
Bollinger Bands are statistical charts that are used for characterizing the prices and volatility with time. Generally, these are financial instruments, and they were invented by John Bollinger. BB Bands are now best utilized for long-term trading to short-term trading. The accuracy of these Bands charts is very decent as the trader needs to follow these charts for future financial movements. This way, all important information about Bollinger Bands has been mentioned above.