They can help you identify and confirm price trends in the market, and they’re extremely intuitive and easy to use. Instead, it is sometimes wise to measure the width of the “no man’s land” area (distance between +1 and –1 SD) and add it to the upper band. By using the volatility of the market to help set a stop-loss level, the trader avoids getting stopped out and is able to remain in the short trade once the price starts declining. Bollinger Band® “bands” can also be a valuable tool for traders who like to exploit trend exhaustion by helping to identify the turn in price. Note, however, that counter-trend trading requires far larger margins of error, as trends will often make several attempts at continuation before reversing.

But the Bollinger Bands ® indicator can also be used for trend-following pullback trading. Once a trend is on its way, traders typically wait for the price to show a pullback phase. A pullback is a short pause in the trending market where the price moves sideways or makes a short move into the opposite trend direction. Evaluating the pullback phases can tell traders a lot about the underlying trending dynamic. Bollinger Bands® use standard deviation of the underlying asset, while Keltner Channels use the average true range (ATR), which is a measure of volatility based on the range of trading in the security.

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  1. For example, when the stock breaks through the upper band, some traders believe this generates a buy signal (breaking through a resistance level).
  2. When this trade is open, the only way to profit is to set a 5% rolling stop-loss.
  3. Again, I do not want to get too technical, but a small excursion is important to understand the approach of the Bollinger Bands® indicator and why it is so powerful.
  4. Once a trend is on its way, traders typically wait for the price to show a pullback phase.
  5. To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend.

For example, using the MACD or Moving Average Convergence Divergence indicator, you can set up a strategy that buys when the Bollinger Bands reaches positive values. Additionally, you can use the MACD’s Histogram to signal when a trade should be exited. Alternatively, combine the Bollinger Bands with the Price Rate of Change, Money Flow Index, or bullish chart patterns. To read Bollinger Bands for a short-term trading strategy, look for breakouts outside the bands.

At extreme lows, a failure of RSI to reach the lower band triggers a buy signal. This is similar to double top and double bottom patterns, respectively, that can occur for the price. Bollinger Bands are a short-term trading tool that can help you decide when to make your move by assessing the relative strength—or momentum—of an investment.

No, Bollinger Bands is a poor indicator for trading, with a 67 percent failure rate; bullish chart patterns such as the Double Bottom have an 88 percent success rate. According to our testing, Bollinger Bands used in isolation perform poorly, so you should combine them with different chart patterns and indicators. Bollinger Bands outperformed the S&P 500 stocks over 20 years, making a total return of 766% versus a buy-and-hold strategy profit of 555%. An indicator that enables 85% of trades to be winners is rare, which made Bollinger Bands profitable on this stock.

What Time Frame Is Best Used With Bollinger Bands®?

We have been trading for over 15 years and during that time, tested hundreds of resources and trading tools. We are starting with the Bollinger Bands ® contraction because a contraction often foreshadows a trend change or a trend continuation and is, therefore, the first important signal. Bollinger Bands ® do not lag (as much) because they always change automatically with the price action.

Should You Use the Bollinger Bands?

It’s been an up and down start to 2024 for US stocks thus far (the S&P 500 is flat more than halfway through January), as markets have struggled to maintain last year’s momentum. Mostly positive company results in the early goings of this earnings season have bumped up against overly aggressive expectations for rate cuts, stubborn prices for some goods, and global conflicts. Apply this indicator to a stock’s chart for a better idea of a trend’s price-movement trajectory, which can help you make more educated guesses about how the stock might perform in the future.

Aside from how the bands/channels are created, the interpretation of these indicators is generally the same. Bollinger Bands® can be a useful tool for traders for assessing the relative level of over- or under-sold position of a stock and provides them with insight on when to enter and exit a position. what cryptocurrency has the most potential in 2021 Certain aspects of Bollinger Bands®, such as the squeeze, work well for currency trading. Buying when stock prices cross below the lower Bollinger Band® often helps traders take advantage of oversold conditions and profit when the stock price moves back up toward the center moving-average line.

A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Standard Bollinger Bands are calculated by taking a 20-day simple moving average of the current price and adding an upper and lower band offset from the moving average by two standard deviations. After the strong breakout from the contraction, the Bollinger Bands ® started widening immediately, signaling the strong trending price action. During trending markets, when the price pushes into one direction with long candlesticks, the Bollinger Bands ® widen, confirming the high level of volatility – a deviation from the normal price behavior. One of the more common calculations uses a 20-day simple moving average (SMA) for the middle band.

Another strategy to use with Bollinger Bands® is called a squeeze strategy. A squeeze occurs when the price has been moving aggressively then starts moving sideways in a tight consolidation. Schwab does not recommend the use of technical analysis as a sole means of investment research. To test whether combining Bollinger Bands with other indicators is profitable, I suggest using TrendSpider, our recommended stock research, and AI-powered trading software. To test the Bollinger Bands on the 500 largest US stocks in the S&P 500, I used the excellent backtesting solution provided by FinViz Elite. Finviz’s point-and-click backtesting engine allowed me to test Bollinger Bands-14 on a daily chart over the previous 20 years.

In the basics, Bollinger Bands consist of a middle line (the simple moving average), and two outer lines, the upper and lower bands, each plotted two standard deviations away from it. Additionally, Bollinger Bands can be used in conjunction with other technical indicators, such as moving averages and relative strength index (RSI), to confirm trading signals. Bollinger, a well-known technical analyst, developed the bands as a volatility indicator for stock prices.

Chart stock signal

For example, when the stock breaks through the upper band, some traders believe this generates a buy signal (breaking through a resistance level). When it breaks below the lower band, some traders believe this is a sell signal (breaking through a support level). Bollinger Bands® are an extremely helpful tool that should be part of every trader’s technical analysis toolbox.

On all other timeframes, Bollinger Bands underperformed the average stock market returns. No, our testing shows using Bollinger Bands is an unreliable indicator using standard settings on all timeframes from phishing attack tricks opensea users 1-minute to daily charts. Bollinger Bands only has a 33% success rate across the Dow Jones 30 stocks. Bollinger Bands can be combined with other technical indicators for a more profitable trading strategy.

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. The bands expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading bitcoin brokers pattern (contraction). Bollinger Bands® is not a standalone trading system but just one indicator designed to provide traders with information regarding price volatility. John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals and indicators based on different types of data.

Some of his favored technical techniques are moving average divergence/convergence (MACD), on-balance volume, and relative strength index (RSI). Range trading is a trading strategy that involves buying low and selling high within a defined price range. Bollinger bands are a widely used technical analysis tool that can aid traders in identifying the range by showing the upper and lower bounds of price action. To implement the Bollinger Band Breakout strategy, traders typically use the 20-day moving average and 2 standard deviation lines as their default settings.