Bollinger Bands (r) is one of the most powerful and reliable trading indicators available to traders. Bollinger Bands (r) is a powerful trading indicator that can be used for reading trend strength, timing trades, riding trending markets, and finding potential market tops to reverse transactions. Bollinger Bands(r) is not a lagged indicator, as it reacts in real-time to the price movement and uses price volatility to adapt to current price behavior.
This article will show you how the Bollinger Bands indicator can be used to improve chart reading and identify high-probability trading entries.
BOLLINGER INDICATOR EXPLAINED
This article is not intended to be too technical, but understanding its basic premise will allow us to use it more effectively. You can skip the section that covers the Bollinger Bands (r) indicator if you don’t care about the basic principles.
Bollinger bands(r) are price channels that are plotted both above and below price movement.
Bollinger bands(r) on the outer edge are based on price volatility. This means they expand during price fluctuations and strong trends. The bars also contract when there are sideways consolidations or low momentum trends. Bollinger Bands (r) will be further apart if the volatility increases and the candles are longer.
The standard Deviation is an important part of Bollinger Bands(r). The standard Deviation is a measure of price fluctuations and variations from the average size of the candle.
A small standard deviation indicates that the size of the candle is close to the average. A large standard deviation indicates that the candle’s scope is all over the place, and it deviates strongly from the average size.
Bollinger Bands (r), an indicator of Bollinger Bands, is based on two concepts in statistics: the confidence interval and the Normal Distribution. Bollinger Bands(r) defaults to 2 standard deviations. A standard deviation of 2 would mean that 95% of all observed price points fall within the Bollinger Bands (r). The graph below is a normal distribution with standard deviations on the x-axis.
It is not my intention to be too technical, but I think it is important to have a little look at the Bollinger Bands (r) indicator to understand better its approach and why it’s so powerful.
If you hear someone saying ” 95% Confidence interval,” they are pretty sure (95% to be precise) that the average candle price will fall within Bollinger Bands’ range. You can make a confident price prediction if you are 95% certain that the price will remain within the Bollinger Bands.
We can say in simple terms that 95% of all price movement occurs between the Bollinger Bands (r). A price movement outside the Bollinger Bands(r) is considered a significant one and represents a 5% deviation.
Bollinger Bands are a great tool for trend-following trading.
TREND-TRADING WITH BOLLINGER BAND
Bollinger Bands r do not lag as much because they change automatically along with price movement.
Bollinger bands (r) can be used to determine the strength and direction of trends. This is a great way to get important information. When using Bollinger Bands to analyze price and market trends, there are a few important things to keep in mind:
Bollinger Bands (r), where two bands meet, often contract before a new trend is established. This usually happens before a breakout during sideways consolidations.
During strong trends, the price will stay close to the outer bands, and the bars will widen when larger trending candles push up the price.
The price will show fading momentum if it fails to reach the outer bands and returns inside the middle. It is similar to a divergence.
Bollinger Band spikes are often a sign that the trend is being exhausted by repeated pushes in the outer bands.
We will now examine each Bollinger band (r) signal individually in order to understand better how we can use Bollinger bands (r) to our advantage.
BOLLINGER CONTRACTIONS
Bollinger Band’s contraction is the first signal we will use because it often signals a trend change or trend continuation.
In the screenshot below, we can see the price first started in an upward trend and then began to move sideways. During this sideways phase, the Bollinger Bands (r), as well as the candlesticks, began to narrow. Long contraction periods are important signals.
Bollinger Bands (r), which signal the strong price trend, began widening instantly after the breakout. Bollinger Bands (r), which widen during trending markets when price pushes in one direction, confirms the high volatility.
BOLLINGER BAND TREND FOLLOWING
The screenshot below shows the price showing an exhaustion of the Bollinger Bands. In an upward trend, the fatigue can be confirmed when the price does not reach the upper Bollinger Bands. The price, which was previously able to trade outside of the upper Bollinger Bands (r) during an uptrend, could not continue its trending phase. This is the first indication of a trend reverse.
The price then moved into the Bollinger Bands opposite (r) before trading outside of the lower band. The price displayed extreme strength, and it was able to close out of the lower band. We know that most candlesticks fall within the Bollinger Bands. If the bar moves outside, it indicates extreme strength in a trend.
After the move outside of the lower Bollinger Bands, the trend continued downwards, and the price stayed close to the lower Bollinger Band. The trend direction is confirmed by strong continuation pushes under the lower Bollinger Band.
Bollinger Bands (r) finally started to contract and narrow when the price began moving sideways using smaller candlesticks. When the price starts to push into the upper Bollinger Bands, a bullish trend could be about to start.