Bollinger Bands

The Bollinger Bands® indicator is an oscillating indicator, developed by John Bollinger. This indicator shows the range and rate of price volatility. The indicator consists of three bands:

• the middle band is the usual moving average
• the top band is the moving average + 2 standard deviations
• the lower band is the moving average - 2 standard deviations

A trader can choose the period of the moving average at his discretion, just like the number of standard deviations (standard values of 20 and 2, respectively).

The interpretation of Bollinger Bands is based on the fact that prices tend to remain between the upper and lower bands.

Features of the Bollinger Bands

• it identifies whether a price is high or low compared to its recent moving average and predicts when it might fall or rise back to that level
• as the price reaches the upper band, it is considered overbought and tends to fall back towards the moving average band
• as the price reaches the lower band, it is considered oversold and tends to rise back up towards the moving average band
• a big space between the upper and lower bands indicates price volatility is high, a small space indicates it is low
• the direction of the trend is very simple: the price chart is between the middle and upper bands - the trend is upward (bullish), the price is between the middle and lower bands - the trend is downward (bearish)
• after narrowing the band, sudden price changes should be expected; the longer the course is traded within the narrow limits of the price channel of the horizontal direction (flat), the stronger will be the way out of it

Bollinger Bands Simple Signals

• when price come out the lower band to bottom, it is signal to sell
• when price come into the lower band from bottom, it is signal to buy
• when price come out the upper band to top, it is signal to buy
• when price come into the upper band from top, it is signal to sell

Bollinger Bands Strong Signals

Walk on the band: when the price touches or crosses the border of the top Bollinger band, the price goes down quite a bit. Then it pushes with renewed force and continues its movement upward. This is called a walk on the band. Similarly for the price movement downward.

• when price walks on the upper band and falls close to the middle band, it is signal to sell
• when price walks on the lower band and grows to the middle band, it is signal to buy

"Double bottom" and "Double top"

The pattern "Double bottom" or abbreviated "W" indicates a buy signal to the following conditions:

• the price touches or pierces the lower lane
• then moves to the middle line and turns around
• a new "low" is formed, which is above the lower band and does not touch it
• the buy signal will be formed when the price crosses the middle Bollinger Band

The pattern "Double top" or abbreviated "M" indicates a sell signal to the following conditions:

• the price touches or pierces the top band
• then moves to the middle line and turns around
• a new "high" is formed, which is below the upper band and does not touch it
• the sell signal will be formed when the price crosses the middle Bollinger Band.

It should not be forgotten that the Bollinger bands are unable to accurately predict the future price movement. Other indicators, such as, for example, RSI or MACD, are additionally used to receive the confirmation signals.