Understanding Bollinger Bands

Another trader favourite indicator are bollinger bands, created by John Bollinger, they’re used on the charts for measuring market volatility.

Bollinger’s consist of these “bands”, which come in three parts.

• Top band (Resistance*)

• Bottom Band (*Support)

• Middle Band (Moving Average)

We put * next to the top and bottom bands because while they’re not really levels of support and resistance, they do often act like it and are a good way of remembering the parts of the bands for simplicity sake. 

How Can We Trade Using Bollinger Bands?

These bands are curves drawn in and around the price structure and consist of a “middle band” (A moving average), an upper band (think of it as a resistance line) and a lower band (think of it as a support line).

Traders also use these bands to tell us whether the market is overbought or oversold (similar to RSI), believing that the higher the price gets to the upper band, the more overbought the market is and visa versa for the lower band.

What do Bollinger Bands Tell us When Using Them to Trade?

The beauty of the Bollinger Bands is that they tell us a lot of information in the single indicator and while not always 100% accurate (no indicator ever is), it does give us a whole lot to go off at a glance.

John Bollinger himself has created 22 sets of rules to follow when using bands as a trading system (which you can google), but as a trader, we really only need to know a few of the most common strategies using BB to make potentially profitable trades.

Bollinger Band Squeeze

The squeeze is one of the major concepts of BB’s and an easy way to remember this concept is to think of bollinger bands like they are “making noise” so to speak.

When the bands are very close together or being “squeezed”, they are being very quiet. This signals a period of low volatility and could be an indication of an upcoming move and increased volatility.

When the bands are far apart, the more likely the chance a decrease in volatility and an indication that it MAY be time to exit the market as we can see below where there was a lot of “noise”, we had a bearish reversal after that large move to the upside.

Bollinger Band Breakouts

We know that most of the action when using Bollinger Bands, occurs between the bottom and top band. Any candles or movements that we see below the lower band, or above the upper band are a cause to pay attention for potential reversals or continuations.

Again however, we take these trading events as a point of interest and not gospel, although we could consider the following:

• When price hits the top band, it COULD be time to sell

• When price hits the bottom band, it COULD be a time to buy

Bollinger Band Bounce

The bollinger band bounce is pretty much how it sounds. The whole idea is that price tends to return to the middle of the bands at some point, this is because the bands act as dynamic support and resistance.

 The price tends to return to the middle of the bands, which is the whole idea behind the Bollinger Bounce.In the above chart, you can see how significant the center band (in particular), as well as the top and bottoms band play and important roles in helping us to confirm potential reversals.

Bollinger Bands Do Have Limitations…

As always, we use Bollinger Bands to help us confirm potential trends along with our other beginner favourite indicators like the MACD & RSI. Bollinger Bands aren’t designed to be a one size fits all indicator.

John Bollinger himself suggestions that Bollinger Bands and the indicators above are best used together to find these areas of interest where you can plan your entries or exits accordingly.

Bonus Tips:

• Higher Time frames will often give more accurate results

• Touches on bands MAY indicate an upcoming trend reversal

• Pay attention when the bands are being quiet or loud

• Use BB”s in conjunction with the MACD and RSI for best result

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