The Bollinger band is a highly useful tool for anyone who trades short-term or uses technical indicators as their primary source of information.
Bollinger bands were invented by John Bollinger in the 1980s as a technical indicator used to determine whether a stock, future, or currency was overbought or oversold. In turn, you can then work out how much volatility there is in a certain market. This can enable you to figure out your next trading position.
So, let’s look at how you can implement Bollinger bands into your trading strategy.
What Bollinger Bands Actually Are
A Bollinger band works like a dynamic support and resistance level. Using these dynamic indicators, you can figure out where something that might be going.
Essentially, Bollinger bands involve a center line and a band above and below it.
The center line is known as an exponential moving average. The bands above and below are known as price channels.
These bands will gradually contract and expand as volatility increases. They’ll contract when the trading pattern remains tight.
As you might guess, the Bollinger bands are a great way to figure out where the price may move next on whatever you’re trading on.
The Bollinger Bounce
You don’t need to understand the mathematical formulas that go into Bollinger bands in order to be a successful trader. What you do need to understand is how they work in practice.
Perhaps the most important action you need to spot is the Bollinger Bounce. The reason why Bollinger bands work as dynamic support and resistance levels is that the price tends to return to the middle of the bands.
So, unless there’s a breakout even a quick price increase or decrease doesn’t necessarily indicate an overall trend.
However, the Bollinger Squeeze can typically occur a few times per week on a 15-minute chart.
This happens when the bands squeeze together. If the price breaks through the top band, it tends to indicate a continuing price increase. Likewise, if it breaks the bottom band it indicates the price will continue to drop.
The Bollinger Squeeze can help you spot trends before everyone else, so you can alter your position before the move happens.
The Bollinger Bands are Not Foolproof
Adding Bollinger bands in modern trading platforms is usually a matter of just pressing the appropriate button.
But you should remember that Bollinger bands are just a part of your trading strategy. They’re a tool and won’t act as a silver bullet for telling you what to do.
They’re helpful, but they should be used as part of other trading indicators.
Last Word – Utilizing Bollinger Bands as Part of Your Trading Strategy
Bollinger bands should always form a part of any smart trader’s strategy. However, you should avoid any total reliance on them. Like any technical indicator, they’re an indicator only not an answer.
Intelligent traders will take the information from Bollinger bands and a variety of other indicators to determine what their next move is.
Have you tried using Bollinger bands yet?