What is Bollinger Bands? Definition of Bollinger Bands, Bollinger Bands Meaning - The Economic Times (2024)

FAQs

What is Bollinger Bands? Definition of Bollinger Bands, Bollinger Bands Meaning - The Economic Times? ›

Definition: Bollinger Bands is one of the popular technical analysis tools, where three different lines are drawn, with one below and one above the security price line. Its specific period moving average is denoted as midline to form an 'envelope'.

A Bollinger Band consists of a middle band (which is a moving average) and an upper and lower band. These upper and lower bands are set above and below the moving average by a certain number of standard deviations of price, thus incorporating volatility.

Key Points. Bollinger Bands track both market volatility and directional trends. The indicator consists of a simple moving average and an upper and lower band representing standard deviations from the moving average. Bollinger Bands can be used on any actively traded financial asset and across multiple time frames.

Using the %b Indicator

Another indicator used with Bollinger Bands is %b, which plots the stock's closing price as a percentage of the upper and lower bands. The upper band is identified as 1.0, the middle band 0.5 and the lower band zero. Thus, %b shows how close the stock's current price is to the bands.

As a simple Bollinger band strategy, you'd typically want to buy when the price gets above the middle band after its second low, and place your stop loss just below the second low. You'd then want to stay in the trade so long as the price is finishing (i.e. “closing”) each week above the middle band.

Bollinger bands help determine whether prices are high or low on a relative basis. They are used in pairs, both upper and lower bands and in conjunction with a moving average. Further, the pair of bands is not intended to be used on its own. Use the pair to confirm signals given with other indicators.

One of these limitations is that the Bollinger Bands are essentially reactive, not predictive. The bands will react to fluctuations in price movements, either uptrends or downtrends, but will not predict prices. Like most technical indicators, Bollinger Bands are a lagging indicator.

What is the best setting for Bollinger Bands? Ans: Bollinger Bands settings depend on your trading style: Scalping: For quick trades, use a moving average of around 10 and a standard deviation of 1.5. Intraday Trading: Set the moving average at about 20 with a standard deviation of 2.

By setting the upper and lower bands two standard deviations away from the SMA, Bollinger Bands create a range expected to contain approximately 95% of the security's price movements over a given period.

Bollinger Bands-based trading strategies seem to have worked well before the mid-1980s and the returns are generally positive for nearly 60 years; however, the returns are mostly negative afterward. The trend line indicates apparent downward profitability in this longer sample.

Which is better Bollinger Bands or MACD? ›

In this comparison MACD is obviously the superior performing system. Not only does it enjoy a better P:MD, but it does so while enjoying a higher percentage of winning trades, better profit-to-loss ratio, and fewer consecutive losses.

The choice of currency pair depends on the trader's trading style, goals, and risk tolerance. However, some traders prefer to use Bollinger Bands with more volatile pairs, such as the GBP/USD or USD/JPY, as they tend to have larger price movements and can generate more trading opportunities.

Bollinger bands can be used on multiple timeframes, ranging from minutes, hours, days and weeks. The common timeframes are daily for short-term traders and weekly for longer-term traders.

Bollinger Bands widen as price volatility increases and tighten as volatility declines. Wider bands imply a higher standard deviation, meaning that an average price is less likely to be concentrated near the mean. Bollinger Bands are used to create context and structure around price.

To calculate the upper Bollinger Band you calculate the Moving Average of the Close and add Standard Deviations to it. For example the upper band formula would be MOV20+(2*20Standard Deviation of Close).

The best combinations with Bollinger Bands are oscillators such as the RSI and MACD. Bollinger Bands are great at pinpointing value price areas in the market, but they do not show the price strength or weakness at such areas. This is where oscillators come in.

The Bollinger Band Breakout strategy involves entering a trade when the price breaks through the upper or lower bands, signaling a potential continuation of the current trend. Traders can establish long positions when the price breaks above the upper band and short positions when it breaks below the lower band.

The Basics of Bollinger Bands

When Bollinger Bands® are far apart, volatility is high. When they are close together, it is low. A Squeeze is triggered when volatility reaches a six-month low and is identified when Bollinger Bands® reach a six-month minimum distance apart.

Traders use Bollinger bands to identify overbought and oversold assets. Price reaching the upper band signals a potential sell, while a drop to the lower band may be a buy signal. An asset is considered overbought when its RSI value is above 70, which indicates that it may be due for a price correction or reversal.

The Bollinger Band Width is the difference between the upper and the lower Bollinger BandsOpens in a new window divided by the middle band. This technical indicator provides an easy way to visualize consolidation before price movements (low bandwidth values) or periods of higher volatility (high bandwidth values).