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Bollinger Bands (BOL) – Technical Analysis Tool


Jul.19.2013

Bollinger Bands is a technical analysis tool to help you identify extreme short-term prices. It was created by Mr. Bollinger in the 1980s, and includes two bands above and below the market price. The Bollinger Bands have a pretty cool mathematical explanation behind them that we obviously are not going to bore you with.

 

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How to Interpret Bollinger Bands (BOL)

Here are some things to know about Bollinger Bands:

Bollinger Bands (BOL) Education - Squeeze and Scratch on Chart Bollinger Bands (BOL) Education - Squeeze and Scratch on Chart

  1. Under normal conditions, you will almost always find the pair within the bands; more specifically, it tends to return to the middle of the bands.
  2. If the Bollinger bands start to squeeze, then there is a reasonable chance that the volatility will increase and a trading opportunity will soon appear.
  3. When the pair moves above the upper band, it is thought to be overbought, and we can expect the price to fall (sell signal).
  4. A move below the lower band suggests that the pair was oversold, giving a buy signal.

 

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Bollinger Bands Squeeze

The Bollinger Bands squeeze is when the bands come close together, constricting the moving average. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade. However, these conditions are not trading signals. The bands give no indication when the change may take place or which direction price could move.

Bollinger Bands Breakouts

Just like any other technical analysis method, there are breakouts involved with Bollinger Bands as well. Approximately 90% of price action occurs between the two bands. Any breakout above or below the bands is a major event. The breakout is not a trading signal. The mistake most people make is believing that that price hitting or exceeding one of the bands is a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement.

So are you wondering when to buy or sell using the Bollinger bands? Here is the answer:

When the pair reaches the lower band, it is a buy signal. When it reaches the upper band, it is a sell signal.

Piece of cake.

However, ALWAYS make sure you check in with the other points of the IDDA as well, if you decide to use Bollinger Bands in your analysis.

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