Bollinger Bands Analysis and Bollinger Trading Signals

Created by John Bollinger

Bollinger Bands are formed by 3 lines. The middle line is a Moving Average - 20 period Simple MA.

The bands are then drawn at a distance away from the moving average These are the bands which form the lower & upper lines.

The distance where the bands are drawn is decided by another trading indicator referred to as the standard deviations. Standard deviation is a gauge of volatility in the trading market or that of indices.

Since the market volatility keeps on changing, the standard deviations will keep changing, and since Bollinger bands are drawn using the standard deviation the distance of the bands will keep on adjusting themselves to the trading market conditions.

When the trading markets become more volatile, the bands widen and they contract during less volatile periods.

The 3 Bands are designed & intended to encompass the majority of the price action. The middle band forms the basis for the trend, generally a 20-periods simple Moving Average.

This band also serves as the base for the upper and lower bands. Upper band's and lower band's distance from the middle-band is determined by market volatility. The upper bollinger band is plotted at +2 standard deviations above middle bollinger band while the lower band is drawn at -2 standard deviations below the middle bollinger band.

Bollinger Bands Stock Indicator Analysis - Bollinger Bands Indicator Example Explained

Stock Analysis & How to Generate Signals

Bands provide a relative definition of high and low

Used to identify periods of high and low market volatility

Used to identify periods when prices are at extreme zones

Consolidation

The bands tighten as the price volatility lessens, this identifies the periods of consolidation. Sharp price break outs tend to occur after the bands tighten.

Indices Consolidation - Bollinger Bands Stock Indicator Example Explained

Consolidation Pattern

Continuation Signal

If the prices break through upper or lower band & move outside of the bands a continuation of current trend is expected.

Bollinger Bands Bulge - Bollinger Bands Stock Indicator Example Explained

Reversal Signals

Bottoms & tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the market trend

Reversal Signals - Example of How to Trade Reversal Signals with This Signals Tutorial

The Head Fake - Stock Index Whipsaw

Traders should be on the look out for false break outs known as whipsaws or head fakes.

Price often breaks-out in one direction immediately following the Squeeze setup causing many traders to think the breakout will continue in that particular direction, only to quickly reverse & make the true, more significant break-out in the in the opposite trend trend trend trend trend trend direction.

Traders reacting quickly on the initial breakout commonly get caught up on the wrong side of the market price action, while those traders expecting a "false breakout" can quickly close out their original position and enter a trade in direction of the reversal. It's always good to combine Bollinger bands with other confirmation Indicators.

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