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Bollinger Band Strategies

Bollinger Bands, its trading strategy and examples explained


What is Bollinger Band?

Bollinger Bands, one of the most popular indicators, is an envelope around stock price indicating the price range of the stock based on stock volatility. When price moves towards the upper band it is often considered as overbought and when it is near the lower range it is considered as oversold.

Who created Bollinger Band ?
John Bollinger, a noted technical analyst invented Bollinger Bands. His finding was influenced by J.M. Hurst's who came with notion of trading envelope around stocks.
Bollinger Band Example

Bollinger Band Components and Formula
Bollinger band has three important dynamic lines
1. Middle Bollinger Band - This is a plot of 20 period simple moving average.
2. Lower Bollinger Band - Middle band - 2 * 20 period standard Deviation.
3. Upper Bollinger Band - Middle band + 2 * 20 period standard Deviation.

Bollinger Band Standard Deviation Concept
Bollinger Band Default Setting
Bollinger Band Setting for Day Trading
Bollinger Band Setting for Swing Trading

Concept of Bollinger Band

Bollinger Band indicates volatility around the price of a stock. When price reaches upper band it is considered as overbought and could be a good exit point and when stock approaches lower band it is considered as a good entry point. These are highs/lows or Support and Resistance . When stock has high price fluctuation the band expands and when Volatility is low they contract to adjust with change in price volatility.
In normal distribution, 68% of the time price should be within one standard deviation and 95% of the time it should be within two standard deviation.


Usages of Bollinger Band

a. They provide excellent support and resistance in sideways market . To identify sideways market look for stocks where 50/100 DMA is flat (parallel to date axis).
b. They can be used to determine Trend reversal. When a stock breaks upper band and stay above it for few trading sessions then it is considered to be bullish and when stock breaks lower band and stays below for some trading sessions bearish signal is generated.
c. In a strong bullish cycle when stock is moving along with the upper band and then moves towards the middle band it can be considered as a bullish trend reversal. In the same way when stock is moving lower band and then moves towards middle bearish trend reversal can be detected.
d. They give very good idea of volatility of the stock. The wider the band the more volatility it has.
e. A very narrowing band means indecision on price movement and a possible break out is imminent.


Breakout of Bollinger Band
1. When the price breaks the upper Bollinger band and both upper & lower band is expanding then probability of further up movement is high. If both bands are expanding fast means trend reversal has happened. If the price breaks below lower band and both upper & lower is expanding then chances are that it will further go down.
2. When the price breaks the upper band and both bands are not expanding means false signal of break out.
3. When bands starts contracting after a trend means momentum in trend is loosing.

Bollinger Band Breakout Strategy Examples
1. Price Cross Above Bollinger Upper Band
Price Cross above Bollinger Upper Band

2. Price Cross Below Bollinger Lower Band
Price Cross Below Bollinger Lower Band

Limitations of Bollinger Band
a. They alone do not provide absolute buy and sell signal.

b. In strong trending Market, Bollinger bands looses its significance. They tend to give many wrong signals. Its best to avoid they in such situations.
c. In actual scenario, Price break above Bollinger band is far more than 95% (as per normal distribution) and not all break gives signal of trend reversals.
d. They often need support of another technical indicator to determine action.


Do's and Don'ts while using Bollinger Band Indicator
Do's
Don'ts

Bollinger Band Screeners
Price Above Bollinger Band
Price Below Bollinger Band
Narrowing Bollinger Band Break Out
Bollinger Band Video Tutorial

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