Bollinger Bands are a very popular indicator and the article describes many ways on how to use it. However, like most technical indicators, it should not be used alone. Bollinger Bands work best when combined with overbought/oversold oscillators. Since Bollinger Bands already take into account volatility and trend, a trader should not use indicators that duplicate this information. Instead indicators that measure volume, momentum, sentiment, open interest are better suited companions for the Bollinger Bands indicator. It is with this information in mind that the general rules presented here should not be taken by themselves as trading strategies.
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Bollinger Bands Summary |
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Bollinger Bands act as a measure of volatility that gives all sorts of information including trend identification; some buy and sell signals, and profit price targets. One of the standard indicators used by all traders. |
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Trend Identification |
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Interpretation |
Description |
Results |
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1. Volatility |
Bands widen Bands shrink |
Increase in volatility Decrease in volatility |
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2. Consolidation – “Squeeze” |
When bands shrink tightly |
Breakout eminent |
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3. Exuberance of Current Trend – “Bulge” |
Bands widen too much |
A reversal is in the works |
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4. Continuation |
Price action closes above upper band/below lower band in subsequent sessions |
Continuation of upward/downward trend |
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Signals |
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1. Double Top |
Peak closes above upper band then next peak closes below upper band |
Sell setup or signal |
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2. Double Bottom |
Low closes below bottom band then next low closes above bottom band |
Buy setup or signal |
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3. Price Targets (In ranging market) |
Price bounced of lower band and approaching upper band |
Band can be used as a profit target for long position |
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Price bounced of upper band and approaching lower band. |
Band can be used as a profit target for short position. |
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