Bollinger Band Basics

The Bollinger Band technical indicator is an analytical technique developed by John Bollinger. It assists traders who use it to compare volatility and relative price levels over a time period.

The whole system involves three bands that are supposed to collectively show the majority of a security’s price action.

These bands include a moving average, an upper band (the average plus 2 standard deviations), and a lower band (the average minus 2 standard deviations). 

In order to use the system effectively, you will need to know a great deal about how it works and understand each component. You may be able to read and learn from a book yourself. Whilst this a proven system - the way traders use it can determine how it works. There are several ways to deal with the Bollinger Band technical indicator.  You can use these rules to help you get started.

Relativity

The first thing to remember is that the Bollinger Bands only provides a relative definition of both high and low.  You can take the definition and compare price action and indicator action, but only at relative levels.  You can use these findings to make decisions about buying and selling.  Keep in mind that volatility and trend are built into this formula, so you won’t need to deal with them otherwise. 

Indicators

You can use the bands with momentum, volume, open interest, and market data in order to gather indicators.  When you do this however, remember that you should not directly relate the indicators to each other.  You can use one indicator that deals with volume and another indicator that deals with open interest at the same time.

However, you cannot use two indicators that deal with volume together. So, be sure that you understand that only one indicator of each type should be used. If you don’t follow this rule, the Bollinger Bands will not be accurate. 

Price Patterns

One thing you can use the Bollinger Bands for is to clarify pure price patterns. You will be able to see tops and bottoms and momentum shifts in prices.  Price is interesting when gathered using the Bollinger Bands because it goes up the upper band and down the lower band. You can successfully use the bands to get patterns in price and then act in the best interest of your investment. Using this system can help you make smarter and more profitable investing decisions overall.

The Moving Average

When dealing with the moving average band(Read more on Moving Averages), you need to note that the default parameters of 20 periods are simply defaults. They are not always representing what the actual parameters of the market are.  Your average should always be a detailing of the middle-term trend.

It may not always be the best for crossovers however.  Also be sure to lengthen the number of standard deviations if the average is lengthened. If the average is shortened, you must shorten the number of standard deviations as well. You must always keep the average logically consistent for the Bollinger Bands to work as they are intended. 

Remember that when you are dealing with the Bollinger Bands technical indicator system that what you see is not a signal to buy or sell. You must take in all the information the Bollinger bands provide in order to make the best investment decision. While the Bollinger Bands technical indicator system is a great way to take a look at patterns and gain helpful insight, it is not a system you should use to base your entire investing strategy upon.

Excellent Bollinger Bands Resource:

BollingerBands.Com