Bollinger Band Analysis and Bollinger Trading Signals

Created and Created by John Bollinger

Bollinger Bands consist of three lines, with the central line being a 20-period Simple Moving Average.

These bands are then plotted at a specific distance away from the MA, forming the upper and lower boundary lines.

The distance at which the bands are drawn is determined by another technical indicator known as standard deviations. Standard deviation serves as a measure of volatility within the trading market or indices.

Because the market's ups and downs always change, the standard deviations will also keep changing, and because Bollinger bands are made using the standard deviation, how far apart the bands are will keep changing based on what the market is doing.

In high volatility, the bands spread out. They narrow in calm times.

The 3 Bands are made to include most of the price changes. The middle band is the basis for the trend, and it's usually a 20-period simple Moving Average.

This central line also acts as the reference point for calculating the upper and lower boundaries. The separation between the upper band and the lower band from this midpoint is directly dependent on current market volatility. Specifically, the upper Bollinger Band is situated at a distance corresponding to +2 standard deviations above the mid-band, while the lower band rests at -2 standard deviations below it.

Bollinger Bands Stock Indicator Analysis - Bollinger Bands Example Explained

Stock Analysis and How to Generate Trading Signals

Bands provide a relative meaning of high & low

Used to identify periods of high and low market volatility

Used to identify periods when the prices are at extreme zones

Consolidation

The bands squeeze when price swings drop. This signals consolidation times. Big breakouts often follow tight bands.

Indices Consolidation - Bollinger Band Stock Indicator Example Explained

Consolidation Pattern

Continuation Signal

If prices push past the upper or lower band & move outside the bands, the current direction of the market is likely to keep going.

Bollinger Bands Bulge - Bollinger Band 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.

The price often breaks out in one direction right after the Squeeze setup, making many traders think the breakout will keep going that way, but it quickly changes and makes the real, bigger break-out going the other way.

Traders who act fast when a price breaks out often get stuck on the wrong side, while those who expect a "fake breakout" can quickly close their first trade and start a trade going the other way. It's always smart to use Bollinger bands with other tools.

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