John Bollinger
created a technical indicator in the 80s after his name: “Bollinger Bands”. Bollinger bands are the result of the observation that volatility was dynamic, not static, as was widely believed at the time.
The price structure of Bollinger Bands consists of three lines. Knowing them will help you read Bollinger Bands:
- A simple moving average (midband) is used to identify the medium-term trend, usually 20 periods.
- Bollinger upper band) is calculated by adding a standard deviation (typically 2) multiplied by a leveling constant (usually 20 periods) to the moving average.
- (Bollinger lower band) is calculated by subtracting a standard deviation for a leveling constant from the moving average.
An upper band (
A lower band
WHAT ARE BOLLINGER BANDS IN TRADING
Having evolved from the concept of trading bands, Bollinger bands use a %b and bandwidth to compare the current price of a stock with the height or depth of the previous price.
Bollinger bands comprise a central band with two outer bands. The center band is always a simple moving average that is usually set to 20 periods and is used because the standard deviation formula also requires a simple moving average (SMA).
The defined period for the standard deviation is exactly the same as the simple moving average.
When markets are volatile, bands widen (move away from the average) and during less volatile periods, the band contracts (close to the average).
The basic interpretation of Bollinger bands is that prices tend to stay within the upper and lower band. The area between the two bands is known as the trading range. Because prices break above or below the trading range, this can be used to identify potential buying or selling opportunities.
BOLLINGER GANG STRATEGY
A Bollinger Bands strategy is commonly used to identify potential trading opportunities using a technique called percent-b, which uses the relationship between the price and the upper and lower bands to identify crowding conditions that could foreshadow significant movement in either direction.
Bollinger bands can also be used for inversions, strings, and snapbacks in the center of the bands. Here are just a handful of Bollinger gang strategies you can employ in your trading:
- Double bottom
- Inversions
- Riding the bands
- Squeezing the Bollinger band
- Snapback in the middle of the bands
- Trading within the bands
