The Bollinger Bands indicator or Bollinger Bands is probably the best indicator of all. This is a real Grail in the hands of an experienced trader! A myriad of trading strategies and systems have been built on this indicator. But 95% of traders don't know how to use it. In this article, I will not only talk about this classic technical analysis indicator, but also teach you how to use and understand it correctly. Don't believe? Read the article to the end, it will not take you much time, but the effect of reading will be very high, and, most importantly, you will be convinced of the veracity of my words!
Introduction
The indicator was coined by California technical analyst John Bollinger and first described in 1987 in The New Commodity Trading Systems and Methods by Parry Kaufman.
John Bollinger was born in France, but his family later moved to New York. From childhood, Jonah was interested in cinema and photography, which is why he entered the School of Visual Arts in New York, where he received the profession of a lighting operator. In 1976 he moved to West Hollywood. But everything changed the moment his mother asked to see her investment portfolio. While working at Financial News, John was able to observe the work of financial analysts, where he gained experience. After completing analytics courses and obtaining the necessary knowledge, he gets a job on a TV channel as a trade analyst. But already in 1991, the rights to the channel were bought by CNBC and John's career on the channel was over. It was during the period from 1984 to 1991 that John Bollinger developed his indicator of rational and effective analysis, called the Bollinger Bands.
This indicator is still relevant today. John Bollinger described in detail the whole mechanism of his indicator in his book "". And in 1996, John was recognized as the best software developer for financial markets.
Description of the indicator
Visually, the Bollinger Bands (BB) indicator consists of two bands that limit the price movement from above and below. The borders of the bands are a kind of support and resistance levels, and most of the time they are away from the price.
Bollinger Bands are similar to moving averages. But the difference lies in the fact that the boundaries of the explosives are built at distances equal to the number of standard deviations. Since the size of the standard deviations depends on the volatility, the Bollinger Bands themselves regulate their size: with low volatility, the bands decrease, and with high volatility, they increase. Thus, most of the time the price is directly inside the bands. Moreover, the larger the standard deviation, the greater the likelihood that the price will not leave the boundaries of the Bollinger Bands.
With standard settings, the main rule for building Bollinger Bands is the following statement - about 5% of prices should be outside the bands, and about 95% of prices should be inside. Bollinger Bands are formed from three lines:
- The center line is a regular moving average with a period of 20
- The top line is the same moving average shifted up by the number of standard deviations.
- The bottom line is the moving average shifted down by the number of standard deviations.
Bollinger Bands are unique in that the change in width is directly related to market volatility. Bollinger bands boundaries are built in proportion to the standard deviation from the moving average (middle line of the Bollinger bands) for the analyzed period. Thus, this indicator indicates the emerging volatility by expanding, and when the volatility decreases, the bands narrow.
Unlike other indicators, Bollinger Bands have one very pronounced and important feature - they show us what is happening directly at this moment in the market, and not the past, as is often the case when using other indicators. BB can be used both independently and in conjunction with other indicators. Of course, everything depends solely on your knowledge, which I will now try to supplement.
As mentioned earlier, Bollinger Bands reflect the actual state of the market at the moment and are able to indicate the main points in trading, such as the beginning and end of a trend, the beginning of an impulse, a false impulse, a flat, a trend. Simply put, Bollinger Bands is a unique indicator that allows you to evaluate the price movement and draw the right conclusion. John Bollinger himself speaks about this in detail in his book Bollinger on Bollinger Bands.
It is possible to use Bollinger Bands without any additional indicators, but only if you know how to build PS levels and zones and technical analysis models.
Formulas for calculating the Bollinger Bands indicator
Bollinger Bands are formed from three lines. The middle line is a simple moving average (SMA). In the expression below, "period" denotes the number of time segments (number of candles) that make up the period for calculating the moving average (by the standard - 20).
The upper line of the Bollinger Bands is the same moving average shifted up by a few standard deviations. In the formula below, "n" stands for the number of standard deviations.
The bottom line of Bollinger Bands is calculated similarly to the top line, but it shifts down.
Bollinger band settings
Bollinger Bands have the following standard settings:
- Period: 20
- Deviation: 2
- Shift: 0
- Price (Apply to): Close
Period
For Bollinger Bands, it is recommended to use a period of 14 to 24 (standard 20) and a standard deviation of 2 to 5 (standard 2). It should be understood that an increase in the period and deviation will affect the sensitivity of the indicator, and a decrease will affect performance - many false signals will appear. Therefore, I recommend leaving the period at 20, and not increasing the deviation more than 3, ideally from 2 to -2.8.
Shift
The offset is best left as default, i.e. equal to 0. But in my practice, I sometimes use a shift of "1". This does not affect the overall picture, but the indicator does not redraw above and below the emerging candle.
Price
The most commonly used for building Bollinger bands are closing prices (Close). Simply put, the indicator will use when plotting the prices that had to close the candle.
Timeframes
The indicator works great on all timeframes. Of course, the higher the timeframe, the more accurate and reliable the signal. Do not forget that different assets can behave differently, so the indicator settings should be selected individually for each asset.
How the Bollinger Bands indicator works
As I said, Bollinger bands show the real state of the market. Of course, there are key points to focus on. Let's take a look at these points. Bollinger Bands is a channel indicator, so it is worth initially analyzing its “calm” state - the state during a sideways price movement.
As you can see, in this state, the Bollinger Bands are directed horizontally. Moreover, this state allows you to determine false impulses. Suppose if the price reaches the upper limit, but the impulse itself (a harbinger of the beginning of a trend movement) is absent, then the lower limit will not react to this and will also be directed horizontally. But if an impulse appears, then the boundaries of explosives begin to expand. You can see it in this screenshot:
The boundaries of the explosives will expand as long as momentum is maintained. As soon as the momentum fades, this is immediately confirmed by the Bollinger bands themselves - the lower border goes into a horizontal position. But the end of the impulse does not mean the end of the trend - the upper limit is still directed upwards.
With the continuation of the trend, all three lines will be directed in its direction, in this example - up. The first sign that the trend will end soon will be a change in the upper limit of the Bollinger bands from ascending to horizontal - this is a signal calling to pay attention to the situation on the market.
If the trend continues, then the upper band again rushes up. But if the trend ends, then the upper band will be directed downwards and the channel will begin to narrow.
In the future, a flat, a new impulse, a trend may form, but this does not bother us anymore. Bollinger Bands tell us what is happening right now, not what will happen in the future.
Thus, we can visually trace the entire trend from the beginning of formation to its completion. It should be understood that in one price movement up or down there can be several trends, respectively, several trends will be shown to us by BB.
Changing the settings of the Bollinger Bands indicator
As mentioned earlier, in some cases, you can change the settings of the BB indicator, thereby adjusting it to the desired assets and trading.
Changing the period will greatly affect the sensitivity of the indicator: with an increase in the period, the indicator will react to changes in the price movement longer, and with a decrease, it will react faster, but give more false signals. Let me remind you that I personally think that period 20 is the most optimal period for this indicator - this is the golden mean. The period itself is the number of the last candles that are used for calculations and plotting bands.
If everything is clear with the period, then the standard extension, in some cases, just needs to be changed. The standard extension determines how many candles will be inside the bands, and how many beyond their borders.
So, with a deviation of “2”, 90.11% of the candles will be inside the bands, and with a deviation of “3”, already 99.98% of the candles. Personally, in my trading I do not use a deviation higher than “2.8” - this is quite enough to get quite good signals in different strategies.
Of course, you should not change the indicator settings without a reason. All changes must be justified!
Ways to use Bollinger Bands in trading
John Bollinger repeatedly focused his attention on the following points of price and indicator behavior:
- A sharp price change mainly occurs after the narrowing of the Bollinger bands (after a decrease in volatility).
- If the price goes (or moves along the border) beyond the Bollinger Bands, then it is worth waiting for the continuation of the movement.
- If the peaks and troughs at the borders of the Bollinger bands are followed by peaks and troughs inside the bands, then we should expect a trend reversal or a transition of price movement to a sideways (flat).
- The price movement that started from one of the borders of the Bollinger bands most often reaches the opposite border.
Bollinger Bands is a universal indicator that allows you to trade completely on any market. But most traders believe that this indicator allows you to receive signals only in the lateral movement. This is not so, and now I will prove it to you.
Bollinger Bands in Sideways Movement
As I already said, the indicator can be used in sideways movement (the most common method). With such trading, we will enter into a transaction every time the price touches the boundaries of the BB, of course, if the opposite side does not expand (many people forget about this or do not know at all).
Bollinger Bands in trending movement
In addition, the indicator can show signals well along the trend. In this case, the center line of the BB will serve as a dynamic support and resistance level. As a rule, almost all trending movement will be in the upper or lower band of the indicator. The trend itself, most often, begins after breaking through the central line of the BB.
Let's take a closer look at the whole process of trend emergence. As already mentioned, the trend most often begins with a breakout of the center line, after which the price reaches the boundaries of the BB. After some time, as a rule, a rollback occurs, which reaches the central line of the BB, and the movement begins from it. Thus, the central line of the Bollinger Bands can serve as a very good resistance support line - the extreme point of correction.
Note that at point 5, the central line of the BB was broken, but the trend did not change - this is a false breakout. It indicates a weakening trend at the moment. It is worth paying attention to such breakouts, most often they indicate the imminent end of the trend.
The price going beyond the border of the Bollinger bands most often means a continuation of the trend, and the more often the borders break through, the more stable the trend! Based on this rule, we can say with confidence that the price movement along the BB border means a very strong trend.
It is important to be able to distinguish a trend from a sideways movement: during a trend, most of the candles are in the upper (if the trend is up) or in the lower (if the trend is down) indicator band, while in a sideways movement, the candles are distributed between the bands approximately equally.
Formation of candles outside the boundaries of the Bollinger bands
There are times when the price breaks the indicator borders very strongly and the next candle is completely formed behind the Bollinger bands. According to the formulas, 90-95% of the candles will be inside the indicator - this means that candles cannot form outside the bands in large numbers, which means there is a high probability (90-95%) that the price will return to the inside of the bands.
It is also worth paying attention to the candles that opened OUTSIDE the border of the Bollinger bands, most often, such candles will be directed inside the bands - to the “zone of their natural habitat”.
Please note that if there is a series of candles with a large body, then the probability of the price returning inside the Bollinger Bands decreases - the probability increases that the price will continue to move in the same direction.
The slope of the Bollinger bands
The slope of the Bollinger Bands allows you to determine the current trend. A downward slope is a downtrend, an upward slope is an uptrend. There are no secrets here, all you need to do is look at the chart.
Contraction and expansion of Bollinger bands
The narrowing indicates that the market is declining volatility. In turn, the narrower the indicator channel, the longer the lateral movement (consolidation) takes. As a rule, after a long lateral movement (consolidation) there is a strong impulse, which can be seen on the chart:
Pattern Recognition with Bollinger Bands
For example, let's take a very common trend reversal pattern - "Double bottom". According to information from John Bollinger himself, if peaks and troughs outside the Bollinger bands (or at the border) are followed by peaks and troughs inside the bands, then a trend reversal is expected. It is by this principle that reversal patterns can be determined. In this example, the first bottom is at the border of the bands, and the second bottom is inside the Bollinger bands - this is a clear sign of a trend reversal.
According to this reversal pattern, the first bottom should be lower than the second, which we can see on the chart. In addition, the narrowing of the boundaries of the BB also hints at the end of the trend.
Advantages and disadvantages of Bollinger Bands
As has been repeatedly said, Bollinger Bands are a unique indicator that can show us a reflection of what is happening in the market at the moment. The indicator performs well when working with both Japanese candlesticks and bars. Bollinger Bands are also a "landmark" on the price chart - due to their slope, it is very easy to determine the current trend. In addition, the narrowing of the bands tells us that the market is moving sideways, while the expansion of the boundaries indicates the beginning of a trend. All this is very easy to determine visually. In addition, if you thoroughly understand the work of the indicator itself, then you can easily determine the beginning and end of a trend.
In addition, this is a classic indicator, which means that it can be found and used on trading platforms from the following binary options brokers: , .
The bands themselves "attract" the price to themselves and "force" it to be inside the bands most of the time. Bollinger bands are suitable for absolutely any market, and not just for flat, as most people think about it. This indicator also simplifies the search for reversal and trend continuation patterns.
Bollinger bands also have disadvantages. The main disadvantage is the lag inherent in all moving averages. During the formation of a candle, a slight redrawing may occur, because. data is taken directly from the close of the candle. In some cases, this causes discomfort.
The second disadvantage is the inferiority of the indicator. You cannot use only one BB indicator to analyze the chart, at least you need to use more support and resistance levels, because. most of the traders rely on them.
Conclusion
Bollinger Bands is an independent indicator that often does not require any filters, but at the same time works great with other indicators and candlestick patterns. If you understand the operation of the indicator itself and the way it is built, then it (the indicator) becomes a real Grail in the hands of a trader!
Sincerely,
Hello dear traders! Today we will tell you in detail about the Bollinger Bands indicator, as well as the possibilities of successful trading using it. This indicator, like the one we recently presented, is one of the classics in the Forex market. And only those tools that bring a noticeable and reliable profit to Forex traders become classic here.
A few words about the author of the Bollinger Bands indicator
So, consider the Bollinger Bands indicator, also called the Bollinger Bands or standard deviation range. The creator of Bollinger Bands, John Bollinger, is a French American. His first love was cinema, and the specialty received already in New York was a light operator. Then he moves to Hollywood and gets a job on the Financial News television channel in his specialty. But even this turns his life upside down, turning a cameraman into a leading financial analyst, but his mother's request to analyze her investment portfolio. One hobby is replaced by another, and after graduating from professional courses, John Bollinger begins working on the same TV channel as a financial news program host. At this time, he creates his own system, which he called rational action analysis, in which the Bollinger Bands indicator was included. The very first description of it can be found in the work of Perry Kaufman "New Methods and Systems of Playing the Commodity Market" in 1987. Then came the book of the author of the system - "Bollinger on Bollinger Bands". It is this book that is the best instruction in using Bollinger Bands in financial analysis. The author himself became the president of an investment company.
Description of the Bollinger Bands indicator
The Bollinger indicator shows the maximum possible price spread based on the magnitude of the previous price swing. Bollinger Bands look like three parallel lines on the chart. The central one is the average value of the price for a given period of time, i.e. . When the price rises, the line goes up, and if the price goes down, it goes down. The lines that limit the range from above and below are the same central line, but with an up and down shift by the number of standard deviations we specified. Band range may expand if the market is large. And if the price is stable and changes slightly, the Bollinger Bands narrow. First of all, we need Bollinger Bands to monitor sharp deviations from the average trend rate of a currency pair. When Bollinger Bands is set up correctly, its center line becomes an indicator, and the borders of the indicator's range can become targets for entering a trade.
See also what are the benefits.
Bollinger Bands indicator settings
- The period recommended by the author is 20, but the possible range for correct operation can be made from 13 to 24. The deviation is set from 2 to 3. Larger values can also be set as the period. But you need to remember that with an increase in the value of the period, the sensitivity of the indicator will decrease significantly;
- Setting the price also has options. Usually the closing price is set, but you can put, for example, a weighted or typical price;
- The timeframe is most often used below D1, but the Bollinger Bands indicator can be used on any timeframe. For different currencies and different time periods, it is important to choose your own Bollinger settings.
How to use Bollinger Bands?
Bollinger Bands show us the following:
See also which offer favorable trading conditions.
Interaction of Bollinger Bands with other indicators
Since the Bollinger Bands indicator is often used for where a trade is entered in the direction of the trend after a small rollback, it is convenient to use additional indicators with it. For this purpose, it is worth connecting oscillators, for example, or WPR, which will confirm the end of the rollback and give an additional entry signal. You can also use Bollinger Bands with an overlay on the RSI oscillator, a link with which can give us a signal earlier than a link of Bollinger Bands with the price. But the CCI oscillator is based on principles similar to Bollinger Bands, but not so convenient. Therefore, it can be safely removed from the chart if you trade using Bollinger Bands.
Pros and Cons of Bollinger Bands
The undoubted advantage of Bollinger Bands is the display of the main axes of trends and sideways ranges. Their interaction with narrowing and widening of the band gives us very convenient tools related to the passage of the price of the boundaries of the tape.
The disadvantage of the indicator is some delay, but it can be controlled by setting the period parameter.
conclusions
The combination of various Bollinger Band movements, contraction and expansion, and interaction with the price chart creates a lot of different signals. To use them effectively, many hours of observation of them and the study of various combinations are required. But, having gained this experience, you will not regret the time spent, because with it you will get an excellent flexible and multifunctional tool for monitoring the market, and hence profitable trading. Since it is impossible to describe all the principles of trading with the Bollinger Bands strategy in one article, we recommend that you read the Bollinger books. Profitable trading to you!
Bollinger Bands is a trend indicator that is included in the standard set of Meta Trader 4 technical tools. In some cases, the bands are called lines and, even more rarely, Bollinger Bands. We already have a wonderful article about Bollinger Bands that will complement this one. Here, the basics of the basics will be given, which will help to better understand the nature of such a technical assistant as the Bollinger indicator, its description will include the study of the components, after which some practical advice will be given.
Bollinger Bands got their name from John Bollinger, who is a successful trader and heads a large company, BoUinger Management Capital, which assists in the management and distribution of capital investments.
Bollinger indicator description
To find and add Bollinger Bands, you need to select "Indicators" - "Trend" - "Bollinger Bands" in the "Navigator" window of MT4. After that, it is necessary to select the found indicator with the left mouse button and press the right mouse button, selecting the "Attach to chart" item in the context menu that opens.
Having correctly performed the described actions, the indicator settings window will appear. Before setting up the Bollinger Bands, it would not be out of place to quickly go through the main parameters to determine if they should be changed.
In order to make the study of individual options of Bollinger Bands more understandable, you can first accept the "factory" settings. Having done this, the following picture will be observed on the price chart.
As you can see, the price is now accompanied by the same three Bollinger bands. The central line is a simple moving average (SMA), which is taken by default with a period of 20. If there is a desire to “speed up” or “slow down” the indicator, then you can increase or decrease the number in the “Period” column in the settings window, respectively.
The upper and lower Bollinger bands are the same 20-period SMA, but taken with a double rejection. In order to increase the width of the tapes and expand or narrow the outer borders of the indicator, you can change the number in the "Deviations" column.
To understand what this very deviation is, you should pay attention to its formula.
Simply put, the standard, or as it is also called, the standard deviation is one of the statistical quantities that allows you to characterize the nature of the variability of observed events. In this case, we are talking about the change in the average values of high and low prices.
The use of the standard deviation in Bollinger Bands acts as a measure of volatility, and thanks to this, the trader always knows exactly when there is a strong movement in the market (the width of the bands becomes larger), and when it fades.
In the above screenshot, you can clearly see that the blue arrow points to a sluggish price fluctuation within a narrow range, while the red arrow points to the area of the chart where the volatility was excessively high.
Having determined the main parameters, you can think about how to set up the Bollinger Bands. To be honest, in the vast majority of cases, trading experts advise not to change anything at all and use the standard settings due to their high efficiency.
Indeed, a number of experiments have shown that the price is mainly in the range between two standard deviations, so there is no point in increasing or decreasing this value, since then the indicator will lose some of its main properties.
The only thing that can be changed in some cases is the period value for the central SMA. This will help you more flexibly customize Bollinger Bands for specific needs. The standard setting of 20 is good for medium-term trading, but if the Bollinger Bands strategy involves the use of short-term or long-term price charts, then this value can be changed to 10 or 50.
A value of 10 is suitable for short time periods when you need to speed up the reaction of the indicator, while a period of 50 will eliminate random "noise" when using a long-term trading strategy.
Specifics of the indicator application
When using Bollinger Bands, you need to take into account some of their specifics. This will help you better understand how the indicator works and increase your trading performance.
Since Bollinger Bands belong to the group of trend indicators, there is no need to expect signals with an exact indication of the entry point to the market. However, this is by no means a disadvantage, as this tool allows a very objective assessment of the overall picture, which makes it possible to join strong movements with high volume, avoiding weak lateral movements.
Still, there are a number of trading signals that can be obtained from this indicator, and you should get to know them better, since trading with Bollinger Bands can be extremely productive.
- Since the central axis of the Bollinger Bands is a classic moving average, you can buy when the price crosses it from the bottom up and sell as soon as prices fall below it. Profit in this case is fixed when the quotes reach the upper or lower border of the indicator - depending on the direction of movement.
- If a trader is confident in the existence of a side trend, then you can trade on a rebound and a rebound from the indicator boundaries. However, in this case, you should be very careful and watch the axis of the Bollinger Bands. If it starts to bend up or down, then you need to urgently exit the transaction, otherwise there is a risk of incurring significant losses.
- Bollinger Bands do an excellent job of defining dynamic resistance and support lines, so they can be added during a trend movement after corrections with significant indicator lines touching. This is a very effective way to follow the trend, especially on daily charts. Just do not forget that in this case you will need to change the default settings and make the underlying SMA slower by increasing the period value to 50.
- If four candles closed outside the indicator border, then a reversal movement should be expected and you can try to trade against the trend. In this case, the main thing is to conduct a trade correctly, since instead of a change in trend, a correction of one or another force may be observed in the market.
Disadvantages of Bollinger Bands
This indicator is fully effective only on highly liquid instruments and may be completely useless in markets with weak price movements. In addition, Bollinger Bands is not a tool that can be advised to beginners, since it requires a certain amount of trading experience and a "sense of the market", otherwise trading using it can lead to rather disastrous consequences.
In this regard, it is desirable that trading does not take place only along the Bollinger Bands, but a combinational approach is used with the use of other technical tools that will help make a movement forecast.
Outcome
For all its shortcomings, the Bollinger indicator, which is described in this article, has become widespread. It is used in various trading strategies - from scalping to long-term trading, and has already helped many traders achieve their financial independence. Therefore, with proper handling and sufficient experience in Forex, you can safely use Bollinger Bands as the main tool for analyzing the current situation.
Trading with the indicator that I am going to talk about is very popular among traders because of the simplicity and efficiency of using this indicator. The indicator was named after its creator, John Bollinger, one of the most successful financial analysts. Bollinger Bands are bands on the chart.
To overlay Bollinger bands (channels) on the chart, click on the tab indicators and select in the pop-up window Bollinger Bands.
To test trading on the lines of this indicator, you can use it in my blog. So, if you overlay Bollinger Bands on the chart, you will see 3 lines, one of them is a moving average (located in the middle), the second is above the chart, the third is below it.
Thus, the indicator creates a corridor of two bands around the moving average. The bands help to determine how high or low relative to the average, the quote is now.
The chart itself is located inside the bands and moves between them, periodically bouncing off the upper and lower boundaries like a ping-pong ball.
By the location of the bands, it becomes clear how calm the market is for Bollinger trading. If the market is calm, we see a contraction of the indicator bands, a corridor. If active movements begin, the bands will expand.
As a rule, a strong expansion of the Bollinger bands can be seen after a long “market calm”. The reason is simple – traders wait for important news before deciding whether to buy or sell an asset. Following the release of the news, we immediately see a strong trend. By the way, you can see all this news in, which I recently posted on my blog page.
The range of price movement, which is inside the Bollinger Bands, is considered to be a normal range. The upper and lower lines are used as dynamic support and resistance lines. I have already covered this topic: you can read it.
Indicator signals
Most traders using this indicator make put bets when the price reverses from the upper line of the indicator or calls when it reverses from the lower line. They serve as a good confirmation of a reversal.
The second type of signal for binary options is traditionally considered a breakdown of the Bollinger bands (waves). Most of the time, the chart stays inside the bands; a sharp breakdown of the bands is considered a strong impulse for the formation of a new trend.
A breakdown of the upper Bollinger band by the chart may signal the formation of an uptrend, and a breakdown of the lower band by the chart may signal a downtrend.
I most often use lines in a different way: to identify chart reversal patterns. There are two very popular reversal patterns, the double top and double bottom. A double top is a strong signal for the start of a downtrend. The model is similar to the Latin letter M.
Conditions for the formation of the M - signal:
- The chart has touched or broken the upper line of the indicator (formed the first peak);
- After the chart has formed the second peak, which is below the first peak;
- Then the chart broke through the middle band.
I buy a put option at the time of the breakdown of the middle Bollinger band.
The second reversal pattern (called a double bottom) is a mirror image of the first. A double bottom is a signal of the beginning of an uptrend, this pattern is similar to the Latin letter W.
Conditions for the formation of W-signal:
- The chart touched or broke through the lower line of the indicator (formed the first bottom);
- Then the chart moved towards the middle line;
- After the chart formed a second bottom, located above the first;
- Then the chart broke through the middle line.
In a similar case, I consider a signal for binary options on a call.
Thus, we single out three main ways to trade with Bollinger Bands:
- Trading with reversals from the upper and lower lines;
- Trading on breakdowns of the bands on the chart;
- Using chart patterns double top/double bottom.
The main advantage of Bollinger Bands is the ease of determining the position of the quote (high or low) relative to the average. This indicator is quite easy to use, which makes it ideal for beginners.
Binary options strategies based on the indications of the Bollinger-Bands indicator (Bollinger Bands):
If you need to download the Bollinger indicator, you can do it for free from the link below.
The invention of the Bollinger Bands or Bands indicator belongs to the American analyst John Bollinger, who in 1984 set out to create his own system for analyzing and calculating investments. After spending about seven years on this, in the early 90s, Bollinger introduced his system to the investment and trading community. Quite quickly, his indicator gained popularity among market participants, was adopted by many traders and is still used today. Currently, John Bollinger is the owner of the financial company Bollinger Capital Management inc, which uses the methods he developed in his work.
The idea behind Bollinger Bands is to combine a trend indicator, a volatility indicator and an oscillator into one. The bands indicate on the chart the direction and range of price fluctuations, taking into account the trend and volatility characteristic of the current phase of the market. Graphically, the indicator consists of three lines: a moving average in the middle, characterizing the main direction of movement, and two lines that limit the price chart on both sides and characterize its volatility.
The upper and lower lines are the same moving average, but shifted by a few standard (root mean square) deviations. Since the size of the standard deviation depends on volatility, the bands adjust their width by themselves: it increases when the market is unstable, for example, during news releases, and decreases during more stable periods. Thus, the indicator implements the functions of an oscillator in a more convenient form, when you can immediately assess on the chart, taking into account the amplitude of fluctuations, whether the instrument is overbought or oversold.
Setting the indicator
The main rule when building Bollinger lines is the following statement - about 5% of prices should be outside these lines, and 95% inside. At the same time, the price should periodically touch the boundaries of the channel, and in case of sharp movements, a short-term exit of the chart beyond the boundaries is acceptable.
Period and standard deviation
Bollinger himself recommended using a 20-period simple moving average as the middle line and 2 standard deviations to calculate the band boundaries. As a rule, the period is set from 13 to 24, and the deviation is from 2 to 5. Also, round values of 50, 100, 200 or Fibonacci numbers can be used as periods. It should be taken into account that the higher the period, the lower the sensitivity of the indicator and the greater the delay. On instruments with low volatility, such settings will render the indicator useless.
Method for constructing an average
The method of constructing a moving average is to choose the one in which the bands will most clearly win back price movements on history. The following types of averages are available in quik: simple (simple), smoothed (smoothed), exponential (exponential) and vol. Adjusted (adjusted for volume).
Moving averages can be calculated using close (close), open (open), high (high), low (low), median = (high+low)/2 and typical = (high+low+close)/3. It is recommended to use close or typical.
Using Bollinger Bands
John Bollinger explains in his book Bollindger on Bollindger Bands that his indicator is not intended for continuous price movement analysis. It is impossible to look at the indicator at any time and draw a conclusion about the further behavior of the instrument. But at certain points in time, the indicator gives signals that, by themselves or in conjunction with other methods of analysis, allow you to use good trading opportunities with high profit potential.
Bollinger Bands are characterized by the following features:
If the boundaries of the channel diverge, then this indicates a continuation of the current trend, and if the outer Bollinger Bands are narrowing, then this may indicate a fading trend and a possible reversal.
The movement that started from one of the borders is likely to continue to the other.
The position of the price chart relative to the middle line indicates the direction of the trend. If the chart is above it, then the trend is up and vice versa. In this case, the line itself should also be directed in the appropriate direction.
1. Buying/selling with the trend after pullbacks.
When an instrument is in a stable directional trend, Bollinger Bands help identify the safest entry point after a pullback. As a rule, when there is an uptrend, the price chart is between the middle and upper Bollinger bands. Then you can buy at the moment when the price rolls back and approaches the bottom line. Moreover, a good confirming signal will be if the price at this moment builds not a zigzag, but a horizontal correction. In this case, the probability of a profitable trade is higher and a short stop behind consolidation support can be used. To exit with a profit, you can use the point at which the price crosses the middle line in the opposite direction or other targets.
The same is true for a downtrend.
2. Sharp price changes usually occur after a narrowing of the band (compression), corresponding to a decrease in volatility.
Quite often, before a strong movement, the instrument is characterized by low volatility. At these moments, there is uncertainty that does not allow buyers or sellers to take over and significantly move the price. When certainty hits (whether it's news, a breakdown of an important level, or the arrival of a major player), those on the wrong side are forced to hastily close their positions, giving momentum to the move.
On the chart, such a situation will correspond to the compression of the Bollinger bands before the movement. Here the indicator does not give direction, but shows the moment when you need to be careful and look for an entry point. As a rule, if the price breaks through one of the extreme lines after compression, then the movement will develop in this direction. However, such a signal may be very late, so it is desirable to use additional signals for entry.
3. Recognition of patterns "double top" and "double bottom"
Bollinger suggests using his bands for more accurate identification of classic technical analysis patterns. For a double bottom pattern, the first low must be below the lower line and the second low at or above the lower line. In this case, an additional signal will be a decrease in volumes at the second minimum. The analysis for the "double top" is carried out in a similar way.
In addition to common applications, there are many trading systems that use combinations of Bollinger Bands with other indicators: RSI, MACD, MFI, Parabolic SAR, etc. Bollinger himself in his book even suggested building bands not for the price chart itself, but for the RSI chart and using the resulting signals. Thus, Bollinger Bands give a lot of scope for building various trading systems and are recommended for development.
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