Unlike a percentage calculation from a normal moving average, Bollinger Bands® simply add and subtract a standard deviation calculation. It happens when the price is moving aggressively and then suddenly starts shifting sideways in a tight consolidation. A trader can visually identify when the price of an asset is consolidating as the lower and upper Bollinger bands strategy bands get closer together on the chart. Yes, Bollinger Bands works reasonably well, but only with a specific configuration using SMA 10 and two standard deviations on a daily chart. This setup is tested to have a 55% success rate and outperforms the S&P 500 stocks. All other standard settings on OHLC/ candlestick charts are not profitable.

• For example, rather than shorting a stock as it approaches its upper band limit, wait to see how it performs.
• The index is not rebalanced since we want to capture how the strategy performs when faced with companies that go defunct.
• If the candles start to break out below the BOTTOM band, then the price will usually continue to go DOWN.
• In the previous section, we talked about staying away from changing the settings.
• Additionally, the Bollinger Bands indicator is a lagging indicator, which means it will only provide signals after the price action has already occurred.
• Conversely, the area near the lower band is often seen as oversold—the price is poised to go up—and a potential support level where buyers could enter the market.

Do Bollinger Bands work?

Percentage bands are quite simple, a moving average shifted up and down by a user-specified percent. For example, at any given time a 7% band consists of a base moving average, an upper curve at 107% of the base and a lower curve at 93% of the base. Percentage bands had the decided advantage at the time of being easy to chart by hand. Relying solely on Bollinger Bands without confirming signals from other indicators or analyses can be risky.

What are the best indicators to use with Bollinger Bands?

Studies have found that Bollinger Band strategies perform well in less efficient markets dominated by private investors. You can find possible entry and exit locations as well as quick, short-term price swings with the aid of Bollinger Bands®. Bollinger Bands® are a versatile and intuitive visual analysis tool that can be useful for many traders. For this reason, expert traders will often use this technical indicator in conjunction with another indicator. Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI) technical indicators are often used to validate Bollinger Bands’ signals.

How to use Bollinger bands using the bollinger bands bounce 3 step strategy

On the other hand, when they continually touch the lower band, the market is perhaps oversold, triggering a buy signal. One of the more common calculations uses a 20-day simple moving average (SMA) for the middle band. The upper band is calculated by taking the middle band and adding twice the daily standard deviation to that amount.

Especially when combined with other confluence factors such as higher timeframe support and resistance levels and other exhaustion signals. While valuable, Bollinger Bands are a secondary indicator that is best used to confirm other analysis methods. Below, we guide you through how to interpret Bollinger Bands, when the tool is best used, and what other indicators are best matched with it.

Bollinger Bands produced a weak 33% average success rate versus a long-term buy-and-hold strategy. Our 12-year tests of the 30 Dow Jones Industrial Average stocks prove Bollinger Bands should be avoided. No, our testing shows that Bollinger Bands is an unreliable indicator, using standard settings on all timeframes, from 1-minute to daily charts.

Similarly, if the price touches or falls outside the lower band, the asset may be oversold, indicating a possible buying opportunity. Traders often interpret the breach of these bands as potential buying or selling signals. When prices touch or surpass the upper band, it may indicate an overbought condition, suggesting a possible reversal or correction.

Our 360 years of TrendSpider backtests conclusively revealed that the best setting for Bollinger Bands is SME 20, with two standard Deviations on a 60-minute chart. That might not seem like more than a chance of success, but the profitable stocks were incredibly successful, and overall, https://investmentsanalysis.info/ the strategy is successful. As a trader, you need to separate the idea of a low reading with the Bollinger Bands width indicator with the decrease in price. Remember, Bollinger Band width is informing you that a pending move is coming, the direction and strength are up to the market.

These bands provide an indication of the volatility of a security and are used to identify potential overbought or oversold conditions. The Bollinger Bands® indicator is among the most reliable and powerful trading indicators traders can choose from. Bollinger Bands® can be used to read the trend strength, to time trade entries, ride trending markets, and find potential market tops for reversal trading. The Bollinger Band® indicator is not a lagging indicator because it adjusts to price action in real-time and the indicator uses the price volatility to adjust to the current price behavior. The three lines that make up Bollinger Bands are based on a security’s price moves. The center line is the intermediate-term trend and is typically a 20-day SMA of the closing prices.

However, when the bands narrow after a period of wide fluctuation, there’s decreased volatility, which might mean a significant price move as the price consolidates. HowToTrade.com helps traders of all levels learn how to trade the financial markets. The standard deviation measures how spread out numbers are from an average value for a given data set.