Bollinger Bands

A Bollinger Band®, developed by famous technical trader John Bollinger, is normally plotted two standard deviations away from a simple moving average but can be adjusted to user preferences. In this example of Bollinger Bands®, the price of the stock is bracketed by an upper and lower band along with a day simple moving average.

The first high can be higher or lower than the second high. A strong upward thrust is a sign of strength, not weakness. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend.

Bollinger Bands

Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms. A “W-Bottom” forms in a downtrend and involves two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the .

Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high.

M-Tops were also part of Arthur Merrill's work that identified 16 patterns with a basic M shape. According to Bollinger, tops are usually more complicated and drawn out than bottoms.

Double tops, head-and-shoulders patterns, and diamonds represent evolving tops. In its most basic form, an M-Top is similar to a double top.

However, the reaction highs are not always equal. The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band.

Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal. The stock moved above the upper band in April. There was a pullback in May and then another push above Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band.

The M-Top was confirmed with a support break two weeks later. Also, notice that MACD formed a bearish divergence and moved below its signal line for confirmation. Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the day SMA middle Bollinger Band , the stock moved to a higher high above Despite this new high for the move, price did not exceed the upper band. This flashed a warning sign.

The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak blue arrow.

This evolving top formed a small head-and-shoulders pattern. Moves above or below the bands are not signals per se. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. Momentum oscillators work much the same way. Overbought is not necessarily bullish. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend.

Think about it for a moment. Bollinger Bands have become an enormously popular market tool since the s but most traders fail to tap its true potential. This intraday strategy picks tops and bottoms based on a clear recovery following an extreme move.

Find entry or exit signals or develop a complete system based on average true range. Learn how traders can use "the usual suspects" standard for trend trading when it comes to choosing indicators for commodities investing.

As we move into September, technology is back to being the hottest sector on Wall Street. Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility Learn more about how to identify buy and sell trading signals when implementing a moving average crossover strategy with Historical volatility is a long-term assessment of risk.

Here's how to calculate it in Excel. Find out about a common strategy that traders use with the volume-weighted average price, including the use of VWAP with See why the statistical concept of moving averages plays a central role for traders and chartists who rely on technical analysis Now, enough about tools already!

When the market is quiet, the bands contract and when the market is LOUD, the bands expand. Notice on the chart below that when price is quiet, the bands are close together. When price moves up, the bands spread apart. One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. If you said down, then you are correct! As you can see, the price settled back down towards the middle area of the bands.

What you just saw was a classic Bollinger Bounce.