Using Bollinger Bands to Gauge Trends

They were created by John Bollinger still alive and kicking! We have come a long way since the bands were developed. During a trend, the trader will constantly be placing trades on the wrong side of the move. A prospectus contains this and other information about the ETF and should be obtained from the issuer. This is where the bands expose my trading flaw. Figure 5 Chart by StockCharts. This article and video will introduce the indicator and focus on two common uses for Bollinger bands and how they can be used to improve your trading.

Bollinger bands are composed of three lines. One of the more common calculations of Bollinger Bands uses a day simple moving average (SMA) for the middle band. The upper band is calculated by.

Chart analysis with Bollinger Bands ®

The earliest example of trading bands that I have been able to uncover comes from Wilfrid Ledoux in He used curves connecting the monthly highs and lows of the Dow Jones Industrial Average as a long-term market-timing tool. After Ledoux the exact sequence of trading band development gets foggy. In Chester Keltner proposed a trading system, The Day Moving Average Rule, which later became Keltner bands in the hands of market technicians whose names we do not know.

Next comes the work of J. Hurst who used cycles to draw envelopes around the price structure. Hurst's work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding. In the early '70s percentage bands became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified percent.

Percentage bands had the decided advantage of being easy to deploy by hand. Arthur Merrill suggested multiply and dividing by one plus the desired percentage. When I started using trading bands percentage bands were the most popular bands by far. Along the way we got another fine example of envelopes, Donchian bands, which consist of the highest high and lowest low of the immediately prior n-days.

Over the years there have been many variations on those ideas, some of which are still in use. Today the most popular approaches to trading bands are Donchian, Keltner, Percentage and, of course, Bollinger Bands. Percentage bands are fixed, they do not adapt to changing market conditions; Donchian bands use recent highs and lows and Keltner bands use Average True Range as adaptive mechanisms.

Bollinger Bands use standard deviation to adapt to changing market conditions and thereby hangs a tale. When I became active in the markets on a full time basis in I was mainly interested in options and technical analysis.

Bollinger himself stated a touch of the upper band or lower band does not constitute a buy or sell signal. Notice how the volume exploded on the breakout and the price began to trend outside of the bands; these can be hugely profitable setups if you give them room to fly.

I want to touch on the middle band again. Just as a reminder, the middle band is set as a period simple moving average in many charting applications. The middle line can represent areas of support on pullbacks when the stock is riding the bands.

You could even increase your position in the stock when the price pulls back to the middle line. Regarding identifying when the trend is losing steam, failure of the stock to continue to accelerate outside of the bands indicates a weakening in the strength of the stock.

This would be a good time to think about scaling out of a position or getting out entirely. Another trading strategy is to gauge the initiation of an upcoming squeeze. John created an indicator known as the band width. The idea, using daily charts, is that when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase. This goes back to the tightening of the bands that I mentioned above.

This squeezing action of the bollinger band indicator foreshadows a big move. You can use additional signs such as volume expanding, or the accumulation distribution indicator turning up. We need to have an edge when trading a bollinger band squeeze because these setups can head-fake the best of us.

It immediately reversed, and all the breakout traders were head faked. You don't have to squeeze every penny out of a trade. Wait for some confirmation of the breakout and then go with it. If you are right, it will go much further in your direction. Notice how the price and volume broke when approaching the head fake highs yellow line. To the point of waiting for confirmation, let's look at how to use the power of a Bollinger Band squeeze to our advantage.

Notice how leading up to the morning gap the bands were extremely tight. Now some traders can take the elementary trading approach of shorting the stock on the open with the assumption that the amount of energy developed during the tightness of the bands will carry the stock much lower. Another approach is to wait for confirmation of this belief. So, the way to handle this sort of setup is to 1 wait for the candlestick to come back inside of the bands and 2 make sure there are a few inside bars that do not break the low of the first bar and 3 short on the break of the low of the first candlestick.

Based on reading these three requirements you can imagine this does not happen very often in the market, but when it does, it's something else.

The below chart depicts this approach. Now let's look at the same sort of setup but on the long side. Below is a snapshot of Google from April 26, Notice how GOOG gapped up over the upper band on the open, had a small retracement back inside of the bands, then later exceeded the high of the first candlestick. These sorts of setups can prove powerful if they end up riding the bands. This strategy is for those of us that like to ask for very little from the markets.

Essentially you are waiting for the market to bounce off the bands back to the middle line. You are not obsessed with getting in a position and it wildly swinging in your favor. Nor are you looking to be a prophet of sorts and try to predict how far a stock should or should not run.

By not asking for much, you will be able to safely pull money out of the market on a consistent basis and ultimately reduce the wild fluctuations of your account balance, which is common for traders that take big risks.

The key to this strategy is waiting on a test of the mid-line before entering the position. You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend and there is a sizable amount of volatility. As you can see in the above example, notice how the stock had a sharp run-up, only to pull back to the mid-line.

You would want to enter the position after the failed attempt to break to the downside. You can then sell the position on a test of the upper band. If you have an appetite for risk, you can ride the bands to determine where to exit the position. This is honestly my favorite of the strategies. If I gave you any other indication that I preferred one of the other signals, forget whatever I said earlier.

First, you need to find a stock that is stuck in a trading range. The greater the range, the better. Now, looking at this chart, I feel a sense of boredom coming over me. However, from my experience, the guys that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. In the above example, you just buy when a stock tests the low end of its range and the lower band. Conversely, you sell when the stock tests the high of the range and the upper band.

The key to this strategy is a stock having a clearly defined trading range. This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far.

You could argue that you don't need the bands to execute this strategy. However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands.

So, instead of trying to win big, you just play the range and collect all your pennies on each price swing of the stock. Like anything else in the market, there are no guarantees. Bollinger Bands can be a great tool for identifying volatility in a security, but it can also prove to be a nightmare when it comes to newbie traders. Don't skip ahead, but I will touch on this from my personal experience a little later in this article.

Not exiting your trade can almost prove disastrous as three of the aforementioned strategies are trying to capture the benefits of a volatility spike.

For example, imagine you are short a stock that reverses back to the highs and begins riding the bands. What would you do? While bands do a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man's failed attempt to control the uncontrollable. While there is still more content for you to consume, please remember one thing - you must have stopped in place!

Let me help you out if you are confused - kill the trade! While bandsdo a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man's failed attempt to control the uncontrollable. Strategy 5 - Snap back to mthe iddle band, will work in very strong markets. I have been a breakout trader for years and let me tell you that most breakouts fail. Not to say pullbacks are without their own issues, but you at least minimize your risk by not buying at the top.

Shifting gears to strategy 6 - Trade Inside the Bands, this approach will work well in sideways markets. Because you are not asking much from the market in terms of price movement. From my personal experience of placing thousands of trades, the more profit you search for in the market, the less likely you will be right. Don't worry, I'm not about to go on a history lesson on cryptocurrencies with details of where David Chaum went to college.

I was reading an article on Forbes, and it highlighted 6 volatile swings of bitcoin starting from November through March So, I wanted to do my own research and I looked at the most recent price swings of Bitcoin in the Tradingsim platform. Let's look at the period of December 22, ,to December 27, During this period, Bitcoin ran from a low of 12, to a high of 16, Let's unpack this a little further. This presented a clear signal that the stock was in oversold territory. The next trading day was not until December 26, which is the time when traders would enter their positions.

This turned out to be an excellent trade. December 26 marked the last time Intel would trade below the lower band. This is a textbook example of what the strategy is looking for. While the price move was not major, this example serves to highlight the conditions that the strategy is looking to profit from. For related reading, see Profiting From The Squeeze.

NYX was clearly in oversold territory. Following the strategy, technical traders would enter their buy orders for NYX on June This is the ideal scenario that the strategy is looking to capture.

Opening a position on June 13 allowed traders to enter right before the turnaround. In a different example, Yahoo broke the lower band on December 20, The strategy called for an immediate buy of the stock the next trading day. Just like in the previous example, there was still selling pressure on the stock. While everyone else was selling, the strategy calls for a buy. That proved correct, as Yahoo soon turned around. On December 26, Yahoo again tested the lower band, but did not close below it.

This would be the last time that Yahoo tested the lower band as it marched upward toward the upper band. As we all know, every strategy has its drawbacks and this one is definitely no exception. In the following examples, we'll demonstrate the limitations of this strategy and what can happen when things do not work out as planned.

BOLLINGER BANDS

Bollinger Bands Overview. I know what you are thinking, "Oh no, not another boring intro on a technical indicator." I created this post to help people learn six highly effective Bollinger Bands trading strategies they could start using immediately. We can use the Bollinger Bands ® to analyze the strength of trends and get a lot of important information this way. There are just a few things you need to pay attention to when it comes to using Bollinger Bands ® to analyze trend strength: During strong trends. Using Bollinger Bands to Improve Your Trading. Posted on March 24, This is common and can be an effective way to identify periods of high risk or trading opportunities. Learning to use Bollinger bands can help you improve the timing of your risk control and trade entries and exits.