Bollinger Bands Contracting



However, it can also indicate the reversing of the trend if the prices break above the upper band. Meanwhile, of strong trends, prices tend to increase or hug the Bollinger band for a long time. But you should exercise additional research to determine the additional profits. Commodity and historical index data provided by Pinnacle Data Corporation. The information provided by, Inc. is not investment advice. Before breaking out, the stock opened below the lower band and then closed back above the band.


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Trending can be analyzed either with the Bollinger main line on its own or by using a combination of the Bollinger and moving averages. Because the main line is just a moving average, you can use it to detect crossover type signals. This means where the fast line crosses above or below the slower moving average line . The bandwidth is useful for detecting periods of contracting or rising volatility.

It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Similarly, prices can “walk the band” with numerous touches during a strong uptrend. The upper band is 2 standard deviations above the 20-period simple moving average. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend.

What Are Bollinger Bands?

They often indicate a lower volume with traders sitting on the sidelines waiting for a news release or some other information to trade on. It is calculated in the same way as a conventional moving average. That is, it simply displays a smoothed version of the price and is useful for giving the broad directional trend of the market. So for example, a thirty period main line averages over the previous thirty bars in the chart. A higher number means more aggregation and therefore less detail. It happens when price action spikes the upper line then recovers down, establishing the first high. Bands® are utilised by technical traders in all financial markets including forex. This article will introduce Bollinger Bands® and how they assist traders in technical analysis. It will also provide an overview of top strategies and tips for trading forex with Bollinger Bands® – including trading the trend and the Bollinger squeeze. Bollinger Bands typically use a 20-period moving average, where the “period” could be 5 minutes, an hour or a day. By default, the upper and lower bands are set two standard deviations above and below the moving average.

Maximizing your Profits with Bollinger Bands

In this one article my goal is to make you an expert on Bands. Not quite sure what they are or how you use them to improve your trading? I am going to explain everything you need to know about the Bollinger Band indicator so that you can start using it to improve your trading. The Bollinger Band Width is the difference between the upper and the lower Bollinger Bands divided by the middle band. This website is using a security service to protect itself from online attacks.

By using non-collinear indicators, an investor or trader can determine in which direction the stock is most likely to move in the ensuing breakout. With a little practice using your favorite charting program, you should find the Squeeze a welcome addition to your bag of trading tricks. Bollinger Bands are one of the most popular volatility indicators developed by John Bollinger. A Bollinger Band®, as we mentioned above, is a tool used in technical analysis. It is defined by a series of lines that are plotted two standard deviations—both positively and negatively—away from thesimple moving average of the price of a security. While every strategy has its drawbacks, Bollinger Bands® are among the most useful and commonly used tools in spotlighting extreme short-term security prices.

Bollinger Bands – Dynamic Support and Resistance

Finally, to capture longer moves, you could consider exiting when the stock tags the opposite band (i.e., the lower band if you’re long, or the upper band if you’re short). In a classic M top, the first high either touches or is outside of the upper band, the price reacts by dropping close to the middle band , and the second high touches inside the upper band. The fact that the second high is within the upper band suggests that it is a lower high on a relative basis. Traders generally use Bollinger Bands to determine overbought and oversold zones, to confirm divergences between prices and studies, and to project price targets. Bollinger Bands trading is mainly centred around analyzing the strength of trends.

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The corrective move against the trend often retraces back to the moving average used in the indicator but definitely shouldn’t move so far as to touch the opposite Bollinger Band. If it does, then it indicates you have an impulse wave in the direction of that move, and it negates the impulse move in the previous direction. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. When price break upper band and both bands are not expanding means false signal of break out.

A conservative trader might decide to collect profits given the substantial gains that have already been made. A more aggressive trader might choose to stay in the long trade and chase more significant profits. When prices bounce from this line, it gives us additional evidence that the upward trend is still in play. The upper and lower bands measure volatility, or the degree in variation of prices over time.

The classic M top is formed by a push to a high, followed by sell-off reaction, and then a test of the previous high. Watching the price behave like this, a trader may wonder if the stock is in a new uptrend, or if it has met its resistance. When there are price pullbacks , and the price stays below the middle band and then moves back to the lower band, it is an indication of a lot of downtrend strength. In a downtrend, prices should not break above the upper band since this would indicate that the trend may be reversing, or it is slowing. If the price pulls back within the uptrends, and it stays above the middle band and moves back to the upper band, that indicates a lot of strength.

  • With a standard Bollinger indicator, the upper and lower lines run symmetrically.
  • A Squeeze is triggered when volatility reaches a six-month low and is identified when Bollinger Bands® reach a six-month minimum distance apart.
  • They are merely one indicator designed to provide traders with data regarding price volatility.
  • That was not intuitively correct at the time, as volatility was viewed as a static quantity, a property of a security.
  • You also sometimes see squeezes just before London comes into play after the relatively light Asian sessions.

Once the squeeze play is on, a subsequent band break signals the start of a new move. A new advance starts with a squeeze and subsequent break above the upper band. A new decline starts with a squeeze and subsequent break below the lower band. In isolation, Bollinger Bands don’t produce absolute buy and sell signals. Instead, they indicate whether the price is relatively high or low, allowing for more informed confirmation with other technical indicators. When I started working in the markets percentage bands were the most popular choice.

The outer bands also play a key role as potential trade locations as they imply prices are relatively “cheap” or “expensive” within the trend. Bollinger Bands Example The lines themselves represent two volatility bands set around a moving average. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you.

If the study confirms the upward move, no signal is generated, and in fact, a buy signal may be indicated. If price touches the lower band and the study does not confirm the downward move, a buy signal is generated. If the study confirms the downward move, no buy signal is generated, and in fact, a sell signal may be indicated.

Bollinger Bands® consist of a centerline and two price channels or bands above and below it. The centerline is typically a simple moving average while the price channels are the standard deviations of the stock being studied. Undoubtedly, it is quite a famous technical analysis tool developed using moving averages and standard deviations techniques. Both upper and lower bands are basically defining 2-standard deviations +/- backed by a 20-day simple moving average . The two trading bands are placed two standard deviations above and below the moving average .


The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band. Breaking above the 50-day moving average on drops in stock price, suggesting a build-up in selling pressure, volume shows above normal values on downside price moves. Finally, the long-term trendline is breached to the downside in the first week of February. A downside breakout would be confirmed by a penetration in the long-term support line and a continued increase in volume on downside moves.

highs and lows

The consensus is that when the price reaches the upper band, it is considered as overbought, and when the price approaches the lower band, it is deemed to be oversold. One of the essential tools used for technical analysis in securities trading is Bollinger Bands. Its primary incentive is to help the trader establish a trend’s direction, spot potential reversals, and monitor volatility. Although traders may use the bands to gauge the trends, they cannot use the tool alone to make price predictions. John Bollinger, the Bollinger Bands’ developer, recommends that traders should use the system along with two or three non-correlated tools that provide more direct market signals. To calculate bands, you should first identify a simple moving average.