Bollinger Bands Explained: Formula & Trading Strategies

Click on the “Custom” item and select the name of the newly installed indicator. Set stop losses and take profits similarly as with long positions. This method appeared as a result of the efforts of the exchange analyst Kathy Lien. How to Make Big Profits in the World of Forex, she described an unusual technique involving the use of two Bollinger Bands of the same type in the same chart. While the most common base shape is a W-bottom, the tops can be double or triple in an M-top. The image above will help you understand what types of patterns m tops look like.

For effective profitable trading, it is important to always be on alert and monitor the market situation. While accessing the market is easy now even from a smartphone, novice traders often have problems with the choice of an instrument for trading. This strategy aims to predict trend reversals by comparing the touch of the Bollinger Bands with the behavior of indicators. The only difference is in the “Inputs” tab, where you can only change the period.

Conclusions on Bollinger Trading

Double tops, head-and-shoulders patterns, and diamonds represent evolving tops. Over 1.8 million professionals use CFI to learn accounting, financial https://www.bigshotrading.info/ analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

• The price then pulls back towards the middle band or lower and creates a new price high, but does not close above the upper band.
• Certain aspects of Bollinger Bands®, such as the squeeze, work well for currency trading.
• Alternatively, you can go to a lower timeframe or trade short-term trades within the channel.
• While the most common base shape is a W-bottom, the tops can be double or triple in an M-top.

Like the previous examples, the next trading day was a down day; this one was a bit unusual in that the selling pressure caused the stock to go down heavily. The selling continued well past the day the stock was purchased and the stock continued to close below the lower band for the next four trading days. Finally, on March 5, the selling pressure was over and the stock turned around and headed back toward the middle band.

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In the process of the market movement along the trend, the stop order should be moved to a break-even position. We take profit when one of the bars crosses the Bollinger Band opposite to the trend direction. For an upward movement this will be the lower Bollinger bands, and for a downward movement it will be the upper one.

If the first point crossed the band, and the second is formed within the channel, then the second low will be considered higher even if it is located lower in absolute terms. Next, we will analyze the techniques for using the Bollinger indicator in detail. Skim the Bollinger Band chart and see how it reacts to price changes. If you encounter any difficulties, we will do it together below.

Before you trade, AskTraders.

They are plotted as two standard deviations, both positively and negatively, away from a simple moving average (SMA) of a security’s price and can be adjusted to user preferences. This can provide a strategy for range-bound markets, with the trader going long when price touches the lower band and short when it touches the top band. However, when a stock is moving in a strong trend, these signals may not work as well. Trending prices can continue to “walk” along the upper or lower bands for an extended time. Certain aspects of bollinger bands®, such as the squeeze, work well for currency trading.

• Because Bollinger Bands are a particularly visual technical indicator, those dynamic changes in volatility are easy to see on a price chart, especially at the extremes.
• Strong trends, especially those developing after a breakout of a trading range, will result in an expansion in volatility that will cause the bands to initially move apart.
• We will identify it using BandWidth, which demonstrates its lowest values ​​during this period.
• Bollinger Bands are unique in that they comprise both a moving average and standard deviations.
• The middle band is a simple moving average that is usually set at 20 periods.
• For trend trading, Ketty recommends opening long positions when the close of the candlestick hits the upper quarter of the double Bollinger indicator.