Bollinger Bands Technical Analysis Indicator Explained

A stochastic indicator​ is another well-known technical analysis tool. Like https://www.bigshotrading.info/, Stochastic indicators can help traders identify overbought and oversold levels.

By default, a 20-period SMA and 2 standard deviations are used to calculate the Bollinger Bands. However, since P&F moving averages are double smoothed, it may be necessary to shorten the moving average period when placing this overlay on a P&F chart. Settings can be adjusted to suit the characteristics of particular securities or trading styles. Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Changing the number of periods for the moving average also affects the number of periods used to calculate the standard deviation.

Pros and Cons of Bollinger Bands

To fix this, a trader can look at the overall direction of the price and then only take trade signals that align them with the trend. For example, only take short positions when the upper band is tagged when the trend is down. If preferred, the lower band can still be used as an exit, but a new long position is not opened because that would mean going against the trend. Bollinger Bands can also be inclined to provide false signals. For example, a false breakout happens when an asset’s price passes through the trade entry point.

Traders can buy a currency pair if it remains within the upper bands of both bollinger bands and sell if the asset trades between both the lower bands. Simply described, volatility is the degree by which the price of the item varies over time. In addition, volatility increases sharply when a reversal is nearing. Bollinger bands show quite a bit of volatility through the width of the bands. Bollinger Bands are a way to compare a security’s volatility and price levels over a period of time.

How to use Bollinger Bands

For example, as shown below, the Relative Strength Index kept rising together with the Bollinger Bands. With this, you can also identify when reversals are about to happen. In addition, the area between the moving average line and the above line is the buying channel. See EMA, SMA, etc. for moving average options; and note Warning section. Update it to the latest version or try another one for a safer, more comfortable and productive trading experience. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

• Invented by John Bollinger in the 1980s, Bollinger Bands can be applied to a variety of different financial instruments.
• The picture above shows that the reversal down from the upper BB is confirmed by the bearish candlestick pattern and the bearish divergence between RSI and the price chart.
• There are four steps to confirm a W-Bottom with Bollinger Bands.
• You can use these swings to help identify potential profit targets.
• Members can also set up alerts to notify them when a Bollinger Bands-based signal is triggered for a stock.

This means when the market pullback towards the 20 MA, it’s an opportunity for you to get long . The price of EUR/USD is at the lower Bollinger Band that coincides with Support, and it formed Bullish Engulfing pattern. Bollinger Bands is a trading indicator created by John Bollinger. Rayner Teo is an independent trader, ex-prop trader, and founder of TradingwithRayner.