How do bollinger bands

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Definition: Bollinger Bands is one of the popular technical analysis tools, where three different lines are drawn, with one below and one above the security price line. These lines show a band or a volatility range in which a particular security price is moving up or down.

Bollinger Bands was developed by John Bollinger in the mid s and he trademarked this term in Initially, it was called trading bands, but later on, John Bollinger evolved this concept and called it Bollinger Bands. Description: Bollinger Bands shows the levels of different highs and lows that a security price has reached in a particular duration and also its relative strength, where highs are near to the upper line and lows are near to lower line. The bandwidth widens and narrows depending on volatility.

Price penetration of the bands alone is not an indicator to enter a trade. This is because during a strong uptrend or downtrend, prices can often stick within the bands. This strategy uses an indicator named 'band width'. Band width is calculated with the following formula:.

The idea behind this indicator is that when it hits a six-month low, traders can expect volatility to increase. At this point in time, a squeeze is triggered and the instrument's price may move significantly. Bollinger Bands can be set to many different timeframes and adjusted to different trading strategies. For example, the bands can track movements on hourly, daily, weekly and monthly charts. A trader looking at long-term moves in an instrument's price may prefer to set up Bollinger Bands on a monthly chart.

In reality, there is no single best timeframe for Bollinger Bands. The timeframe used will depend on the strategy of the trader. In a double bottom, an instrument's price will move sharply lower, with substantial volume, and close outside the lower Bollinger Band. It will then rebound higher briefly towards the middle band. Lastly, it will fall lower again, this time on lower volume, and close just inside the lower band. This pattern indicates that downward pressure has subsided.

There is a shift from sellers to buyers. Often, the next price movement is a strong move upwards off the second low. Traders may look to go long, targeting the middle or upper band. For example, the price may gap up above the upper Bollinger Band, but close near the low for the interval. This can be a signal that the trend will reverse in the near term. The trader may take a short position, targeting the middle band.

In the same way, the price may fall below its lower Bollinger Band, but close near the high for the interval. This would indicate that the trader could go long, targeting the middle band. You can combine indicators on charts and make use of our drawing tools to indicate trendlines, support and resistance levels and potential buy and sell points. Range of draw tools and technical indicators, including Bollinger Bands, that are offered on our Next Generation platform.

Our Next Generation platform is also available for trading on the go with mobile or tablet devices. We offer Bollinger Band trading for mobile-optimised charts and and technical layouts.

Seamlessly open and close trades, track your progress and set up alerts. Bollinger Bands are an effective technical analysis indicator, however, they do have limitations. Bollinger Bands are based on an instrument's simple moving average, which uses past data points. As a result, the bands will always react to price moves, and not forecast them.

Bollinger Bands can also be prone to providing false signals. For example, a false breakout occurs when an instrument's price passes through the trade entry point. It signals a trade, but then moves back in the other direction.

This results in a losing trade. When trading with Bollinger Bands, traders should understand that standard settings will not suit all strategies. Long-term position traders may prefer to use a greater number of periods and a higher standard deviation, whereas day traders and swing traders may prefer to use a lower number of periods and lower standard deviation. For this reason, the Bollinger Bands indicator is best used in conjunction with other indicators and tools as part of an overall trading strategy.

In summary, Bollinger Bands are a useful technical analysis tool. Bollinger Bands can also help predict trend reversals. Traders should remember that Bollinger Bands are based on historical information. Disclaimer: CMC Markets is an execution-only service provider. The material whether or not it states any opinions is for general information purposes only, and does not take into account your personal circumstances or objectives.

Nothing in this material is or should be considered to be financial, investment or other advice on which reliance should be placed. Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks.

When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results. Skip to Main Content. Search fidelity. Investment Products.

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