Bollinger Bands Trading Strategy: Explained

Just make sure you make the trade in the direction of the breakout. To achieve your targets using the Bollinger Bands, Squeeze is touted to be one of the best strategies. Relative strength index is a technical indicator that measures the strength of current price trends in comparison to previous price trends. The oscillator tool is displayed as a line graph that moves between two extremes . When RSI is combined with Bollinger Bands, traders can spot the buy and sell positions in the chart. What we have understood from the working of the Bollinger Band is that bandwidth between the upper and lower bands represents the volatility in stock price for a given period.

bollinger band settings

Bollinger bands squeeze when the price consolidates or moves sideways. Nevertheless, it is advisable that while trading one must apply other indicators as well and not rely on Bollinger’s Bands or any one of the indicators, entirely. The thing is, before you buy or sell, you take your time and you understand the trend. If the current stock price is approaching the upper Bollinger Band, it may indicate that the stock is overbought, and vice versa. Investors can decide whether to sell or buy stocks based on whether they are overbought or oversold.

Working and Trading Strategies of Bollinger bands

The squeeze means the low volatility in the market and potentially high volatility is waiting shortly providing trading opportunities when the bands move wider. When the squeeze phase is over, the price tends to make a healthy move in either direction. When this move is supported by high volume the new trend is confirmed in the breakout direction benefits of international trade as many traders are showing confidence in the breakout movement. For a long position, we will use a breakout above the 1 standard deviation of the 20 period EMA, that is the upper band of the Bollinger Band with setting. We will simultaneously check if the ROC is above zero. These conditions conclusively establish a strong upward momentum.

bollinger band settings

💡 Objective This script is a rebuild of the pre-existing ATR indicator, with improvements and fine-tuning. Optional calculation of the ratio between current volatility and average volatility 3. Price can exceed or hug a band envelope for prolonged periods during strong trends. On divergence with a momentum oscillator, you may want to do additional research to determine if taking additional profits is appropriate for you. In the below chart, it has been shown how the stock prices daily movements go back and move along with supper and lower band.

Usually, the maximum lifespan of price movement occurs between the two bands. As a result, to make maximum returns newbie investors should ensure this strategy. You might have heard this phrase called “Walking the bands” often while discussing BB. To put it simply, when the candles are being formed on the upper/lower bands (i.e. the candles overlap the band borders), then the price is said to be walking the bands. When the price is walking on the upper band it is said to be relatively high and is commonly observed in an uptrend.

It happens when a stock price hits the high, slumps to shoot up again and fall, representing a prominent M pattern. The fact that the second-high fails to reach the upper band is a sign of waning momentum and indicates a trend reversal. First moving average for a period, typically a 20 days simple moving average , is calculated and placed on a line graph. Next, standard deviation points are plotted against it to represent price fluctuation.


If its remains on either side of the band for a long time then it gives a breakout and you may expect a sudden reversal of a trend. Therefore, you need to look for the timing of the reversal so that you can make the money. Bollinger Bands are a technical indicator developed by John Bollinger. They represent the volatility in prices of a security in chart form. They are very useful to technical analysts or a trader.

bollinger band settings

As said above, the price moving along or exceeding the band isn’t a clear indication to come across a buy or sell decision; it can reverse as well. Overall, these bands never depict the futuristic changes in the trading environment; the entire process revolves around guessing works. In the Bollinger Bands, the squeeze refers to the phase when bands become too close, contracting the middle band . That’s why investors should have a decent familiarity with downtrends and must be aware of its early signs to avoid losses. Here are the various ways a trader can use Bollinger Bands Tool, to make profits in Stock market.

Bollinger Band and Price action Trading strategy

When you see it, remember you’re looking at a promising trading opportunity. Looking at the image below, you will see various types of squeeze patterns that I have marked with my rectangles. The longer the squeeze, the bigger the target it promises.

  • Watch out for a false move in opposite direction which reverses before the proper trend begins.
  • Bollinger Bands use 2 parameters, Period and Standard Deviations, Steve.
  • It happens when a stock price hits the high, slumps to shoot up again and fall, representing a prominent M pattern.
  • For example, if a price bounces off the lower band and then crosses above the moving average, the upper band then becomes the profit target.

The prices can flip back and forth, so one should also bear this thing in mind. For instance, the prices can also cross the bands and suddenly flip back inside the band, creating a negative situation. When you observe a big gap between the bands, it signifies an increase of volatility, and the existing trend is likely to end. By definition, Bollinger Bands imply that the the price will hit either the top or the bottom and settle down around the middle band.

Calculation of Bollinger bands

The indicator’s random or default settings may not operate well. Before utilizing the indicator for real trades, adjust it and test it out with paper trade. Do combine this indicator analysis with another indicator for an accurate result. Bollinger band is used to evaluate if prices are relatively high or low. They’re used in pairs, with upper and lower bands, and with a moving average in between. Use the pair to double-check indications generated by other indicators.

Bollinger Bands Strategy : Stop Loss and Target Price

If you have understood what was explained above, check the following chart. However, it will help if you use another indicator such as the MACD. If you notice, the MACD gave an advance signal in the chart above. As you can see from the Bajaj Finance chart above, the traditional method of trading Bollinger Bands does work out.

Bollinger bands are a tool, not a precise indicator. They don’t always provide accurate data, thus it’s up to the trader to use band parameters that work the majority of the time for the asset being traded. The strategy is predicated around having low volatility in price action and then looking to capture a move when price starts to trend outside of the Bollinger bands. This strategy has only been backtested for 1 month but it has promising results so I will be sharing it looking for feedback.

One can explore buying opportunities when the price rebounds from this support or gives a breakout with other firm bullish signals. You might have heard, “Investments are subject to market risk” a lot of times due to the volatile nature of the market. Even the markets enjoy their gala time playing- idhar chala main, udhar chala quite often with us.

So if you are investing, buy when it is in the value buying zone for the long-term. Bollinger Bands can be effectively used by both long-term and short-term traders by identifying the market momentum or trend exhaustion or trend reversal. Traders can adjust the SMA and standard deviation assumptions as they see fit which makes it very flexible to use. This user-friendly technical indicator has especially proved to be of significant importance to short-term traders as it determines the extreme short-term prices in the market. Bollinger Bands help the traders to exploit the volatility of the market to their advantage by providing information about the market condition . First, we calculate a simple moving average for a stock, (10 days moving average for short term, 20 days moving average for medium-term and 50 days moving average for long-term).

The settings appear in the top left-hand corner of the chart and would generally show as ’20, 2′ under the default settings. Higher than 20, minimal false trading signals can be expected, but trading opportunities may be missed. Lower than 20, more trading signals can be expected, including false ones. Any Grievances related the aforesaid brokerage scheme will not be entertained on exchange platform. Welcome back to a new blog of ‘Learn with Upstox’. is a financial website which provides news, articles, data and reports related to business, finance and economics.