What Is Bollinger Band Strategy?

Learn about Bollinger Band Strategy, Definition & Explanation, Trading tips from experts, Master working strategies right now | TradeOr

blog-post-image

Intro

If you want to make money through trading (stocks, forex, cryptocurrency etc.), you will help your odds enormously by analysing price data. The Bollinger Band strategy is one way of doing this. 

 

While there is no specific tool for data analysis which can guarantee an accurate future forecast, using charting techniques such as Bollinger Bands has been shown to help. This Bollinger Band formula can be used in a number of ways to interpret data and it is particularly popular with traders looking to profit from short to mid-term trends. In order to use it, you will need to find the right online trading platform. 

Bollinger Band Calculations

Pricing information about a commodity is usually transformed into graph form when a trader wants to get a sense of its trajectory. A number of clever people over the years have come up with formulas to help make sense of the seemingly random price movements. John Bollinger was the mastermind behind the Bollinger Band strategy. The equation he created is actually quite simple, but it has wide-ranging applications, from simple to advanced Bollinger Band strategies.

Bollinger Bands can show you price direction, volatility, where to set your stop loss, when to sell and what to do when the price nears the upper and lower bands. Seasoned users may play around with the number of periods included in the calculations to find the best Bollinger Band settings. If you can understand how this indicator works, it will be fairly straightforward to understand its uses.

Bollinger Band Analysis

Bollinger Bands overlays three bands onto the graph of an asset’s price data, including by default the previous 20 periods. The middle band reflects the average price over all these periods. The upper band is the same but with 2 standard deviations added, and the lower uses the same average but with 2 standard deviations subtracted. These deviations reflect volatility so by centring the equation around volatility, Bollinger was able to create a forecast for the area (between the upper and lower bands) where the data would fall. Of course, this doesn’t give you the exact parameters. “Price breakouts” can often occur but the price rarely crosses the Bollinger Bands. That’s why investors rarely trade outside of these margins. 

 

One of the first Bollinger Band rules is to buy when the share price is between the upper and lower bands, ideally closer to the lower one (and sell near the top of the higher band). Another great Bollinger Bands strategy is to look for “the squeeze”. This is where the upper and lower bands come close together, showing there is high volatility. The bands can be used in the forex market as double Bollinger Band strategy or customized as a Bollinger Band scalping strategy. Bollinger bands are a useful tool for most traders so make sure you use an online broker with a range of built-in data analysis tools, such as TradeOr. 

 

Conclusion

Bollinger band strategy is an excellent way to extract more information from an asset’s price data. It has broad utility, whether you want to analyse data from cryptocurrency, forex, the stock market and more. It can aid you no matter what your investment time range, but it is particularly helpful for swing traders, day traders or scalpers. Eliciting the likely range of future price movement, the Bollinger Band has established itself as one of the best indicators. You can start using it and a number of the latest market analysis tools on TradeOr’s trading platform. 

Previous Lesson What is price action? | TradeOr Next Lesson Learn how to trade CFD with TradeOr