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Bollinger Bands

Technical Analysis

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Bollinger Bands are volatility measurements based on the simple moving average of closing prices. Standard deviations bands are created above and below the moving average. These bands adjust in distance based on the volatility. The bands narrow in low volatility. The bands widen in high volatility.

Bollinger Bands

Signals are most reliable in a non-trending market, in trending market signals in the direction of the trend are most reliable. Bollinger Bands warn of price moves. There’s 5 basic trades. Two for an uptrend, Two for a downtrend, and one for both.

Uptrend

Bollinger Bands

Buy completed swing low off lower band, Ride the Rise. Strong trend preferred.
Buy completed swing low off middle, Ride the Rise.
Buy breakout to the top of Narrow Band, Ride the Rise.

Starting left and moving right, the example image shows a bounce off the lower band in a consolidation. Pass on it. There’s no guarantee price will begin trending upwards. The first sign is of a potential trade is a breakout to the topside. If you have a bullish fundamental bias, you could take this trade. It may be a false breakout, so you would incur some risk. This would be a decent place for a small size initial position backed by bullish fundamentals. Finally, you have multiple swing lows at or near the mid line. You would start a position if you hadn’t previously with higher confidence and add to the position with each new swing low at or near the middle.

Downtrend

Bollinger Bands

Sell completed swing high off upper band, Ride the Fall. Strong trend needed.
Sell completed swing high off middle, Ride the Fall.
Sell breakout to the bottom of Narrow Band, Ride the Fall.

Starting left and moving right, the example picture shows an exit from consolidation with bounces off the middle band in a downturn. This is an excellent place to open a low size starter position and add on future swings off or near the mid-line. Price consolidates again and swings off the upper band. Pass on these. We don’t want to sell off the upper band in a consolidation. Wait for a continuation of the bearish trend if it exists. If we get bullish signals, we would close out the trade.

The bands narrow, and since we remained in the trade, we’d look for a breakout to the bottom. We get a lower band breakout, and add capital to the position. Now we’re looking for swing highs at or near the middle band. Each time we get a swing high we’re going to add to the position. Fortunately, this picture shows us at least 4 to 5 places we could add to our existing position while risking very little in losses.

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