They are used in pairs, both upper and lower bands and in conjunction with a moving average. Expanding volume on a breakout is a sign that traders are speculating that the price will continue to move in the breakout direction. When the price breaks through the lower or upper band, the trader sells or buys the asset respectively. A stop-loss order is traditionally placed Bollinger bands strategy outside the consolidation on the opposite side of the breakout. Conversely, when the distance between the bands expands, an increase in market volatility or price action is found. If the bands begin to form a slight slope and track almost parallel for an extended period of time, the price will usually be found to swing between the bands as though in a channel.
Profitable Bollinger Bands Strategy Settings
Developed by John Bollinger in the 1980s, these bands visually represent market volatility, helping traders identify potential entry and exit points. Mean reversion strategies can work well in range-bound markets, as prices can be seen noticeably bounce between the two bands. However, Bollinger Bands don’t always give accurate buy and sell signals. For example, during a strong trend, the trader is at risk for placing trades on the wrong side of the move since the indicator can suggest overbought or oversold signals too soon. In range-bound markets, mean reversion strategies can work well, as prices travel between the two bands like a bouncing ball.
Double Bollinger Bands (DBB)
After a period of consolidation, the price often makes a larger move in either direction, ideally on high volume. Expanding volume on a breakout is a sign that traders are voting with their money that the price will continue to move in the breakout direction. The Bollinger Bands Bounce trading strategy is a technique that uses the Bollinger Bands indicator to identify potential trading opportunities. The strategy involves buying when the price of an asset falls below the lower Bollinger Band and selling when it rises above the upper Bollinger Band. Bollinger Bands are one of the most important technical indicators for because they adjust well to volatile market conditions. This indicator can be used to identify periods of increased volatility as well as potential price changes in an asset.
Bollinger Bands ® Contraction
Conversely, the area near the lower band is often seen as oversold—the price is poised to go up—and a potential support level where buyers could enter the market. Bollinger Bands were created by John Bollinger in the ’80s, and they have quickly become one of the most commonly used tools in technical analysis. Bollinger Bands consist of three bands—an upper, https://investmentsanalysis.info/ middle and lower band—that are used to spotlight extreme short-term prices in a security. The upper band represents overbought territory, while the lower band can show you when a security is oversold. Most technicians will use Bollinger Bands in conjunction with other analysis tools to get a better picture of the current state of a market or security.
During these instances, it can be hard to determine when the selling pressure will end and therefore, a protection of sorts is needed for once there has been an acute decision to buy. This means that the price zone created between the 1 and 2 standard deviations can trigger many buy and sell signals. As the name suggests the double Bollinger bands strategy uses 2 Bollinger bands instead of just one. This means that the buy and sell signals are two times more powerful. The middle band is configured in many charting applications as a 20-period simple moving average.
Rigidly adhering to a single trading strategy with Bollinger Bands can limit adaptability to changing market conditions. This basic example outlines how to create a Bollinger Bands-based trading strategy in Python. One must ensure that the strategy is thoroughly tested and optimised, and risk management rules should be applied to control losses. Developing a trading strategy with Bollinger Bands in Python involves leveraging this technical indicator to make informed buy and sell decisions in a systematic and automated manner. Usually, traders hone in when the price breaches the lower band and rebounds for a short while before diving again. If the second low is above the lower band, it is generally assumed that it is a double bottom and there is a strong chance that it will be an uptrend.
- How to trade using Bollinger Bands would vary depending on trading style and goals.
- Double Bollinger Bands strategy advises you to enter long trades when price breaks below the lower standard deviation and vice versa.
- John Bollinger explains that Bollinger Bands are not a standalone indicator and should always be used in combination with others.
- The standard deviation measures how spread out numbers are from an average value for a given data set.
- So, how do Bollinger Bands hold up against other momentum-seeking strategies?
According to Bollinger, it is necessary to look to other indicators to determine breakout direction. He suggests using the relative strength index (RSI) along with one or two volume-based indicators such as the intraday intensity index or the accumulation/distribution index. As John Bollinger acknowledged, “tags of the bands are just that, tags, not signals.” A tag (or touch) of the upper Bollinger Band® is not in and of itself a sell signal. A tag of the lower Bollinger Band® is not in and of itself a buy signal. A common approach when using Bollinger Bands® is to identify overbought or oversold market conditions.
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.
For example, a false breakout happens when an asset’s price passes through the trade entry point. It signals a trade but then moves back in the other direction, resulting in a losing trade. When the price breaks through the upper or lower band, the trader buys or sells the asset, respectively. The most common Bollinger Bands Trading Strategies are the overbought and oversold approach, the squeeze and using Multiple Bollinger Bands on different standard deviations. Suppose instead the price chart shows trading is reaching the lower Bollinger Band and the RSI is not under 30. In this case, the RSI is telling the investor the security may not be oversold as the Bollinger Bands seem to indicate.