December 14th, 2010 
Stock Trader
Bollinger Bands Explained
Bollinger Bands are generally plotted as two standard points away from a simple moving average (SMA). Bollinger Bands can adjust themselves to current market conditions as standard deviation is measured by volatility. Bollinger Bands contract during less volatile periods & widen during volatile periods.
Most of the time you’ll see Bollinger Bands with a simple moving average in the center. Most swing traders use Bollinger Bands over a 10 day period but they can also be used effectively on intraday trading charts.
The whole picture is not provided using Bollinger bands, its important that we use other indicators such as Stochastic, SMA, RSI or Money Flow to get a better view of the markets. Usually when a stock touches one of the Bollinger Band lines, this is an indication of a continuation or a reversal in the other direction.
Use both RSI & MACD to confirm this. The RSI indicator will give you a good idea of the current over bought or over sold level. Usually if the stock price touches the Upper Bollinger Band & the RSI is below 70 the trend will continue. If the stock price touches the lower band & the RSI is above 30 then the opposite will happen. Conversely, when the price touches the upper band and RSI is near 75-80, the trend may reverse itself and move downward. The same condition exists when the price touches the lower band and RSI is below 25-20.
Note: Bollinger Bands are used to confirm trading signals & work best with other indicators.
Important:
When using bollinger bands its important to know that they are calculated using a specified number of calculated deviations above & below the moving average which will cause them to widen when prices are volatile & contract when prices are stable.
Chart courtesy of StockCharts.com
How To Use Bollinger Bands
A contracting band is a sign that the market is about to trend. Usually the bands will meet up into a narrow neck which will be followed by a sharp price movement. Note that the first break out will usually be a false start, preceding a strong trend in the opposite direction. Also in a ranging market if a stock price starts at one band it normally carries through to the other. A move outside the band indicates that the trend is strong.
If a trend hugs the upper band, this signals that the trend is strong, use the other indicators to confirm this.
Did you like this article on Bollinger Bands? Have you used Bollinger Bands in the past? Let our readers know how you got on by adding a comment below…
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I always use Bollinger Bands before I enter a trade. I often find that I can easily spot entry levels when I use them along with the other major indicators.They’re definitely a must for anyone whose serious about finding winning trades.
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