Bollinger-Bands

Flexible and visually intuitive to many traders, Bollinger Bands can be a helpful technical analysis tool. Invented in by John Bollinger, they’re designed to help traders evaluate price action and a stock’s volatility. Before we get to how they can do that, let’s talk about what they are.

The Bollinger Band Width is the difference between the upper and the lower Bollinger Bands divided by the middle band. Overall, APD closed above the upper band at least five times over a four month period.

Description

Bollinger Bands Overview. I know what you are thinking,

The subject line of the email you send will be "Fidelity. Bollinger Bands are a type of price envelope developed by John Bollinger. Price envelopes define upper and lower price range levels. Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price.

Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price. The default values are 20 for period, and 2 for standard deviations, although you may customize the combinations. Bollinger bands help determine whether prices are high or low on a relative basis.

They are used in pairs, both upper and lower bands and in conjunction with a moving average. Further, the pair of bands is not intended to be used on its own. Use the pair to confirm signals given with other indicators. First, calculate a simple moving average. Next, calculate the standard deviation over the same number of periods as the simple moving average.

For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average.

These sorts of setups can prove powerful if they end up riding the bands. This strategy is for those of us that like to ask for very little from the markets. Essentially you are waiting for the market to bounce off the bands back to the middle line. You are not obsessed with getting in a position and it wildly swinging in your favor. Nor are you looking to be a prophet of sorts and try to predict how far a stock should or should not run.

By not asking for much, you will be able to safely pull money out of the market on a consistent basis and ultimately reduce the wild fluctuations of your account balance, which is common for traders that take big risks. The key to this strategy is waiting on a test of the mid-line before entering the position.

You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend and there is a sizable amount of volatility. As you can see in the above example, notice how the stock had a sharp run-up, only to pull back to the mid-line. You would want to enter the position after the failed attempt to break to the downside. You can then sell the position on a test of the upper band. If you have an appetite for risk, you can ride the bands to determine where to exit the position.

This is honestly my favorite of the strategies. If I gave you any other indication that I preferred one of the other signals, forget whatever I said earlier. First, you need to find a stock that is stuck in a trading range.

The greater the range, the better. Now, looking at this chart, I feel a sense of boredom coming over me. However, from my experience, the guys that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. In the above example, you just buy when a stock tests the low end of its range and the lower band. Conversely, you sell when the stock tests the high of the range and the upper band. The key to this strategy is a stock having a clearly defined trading range.

This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far. You could argue that you don't need the bands to execute this strategy. However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands.

So, instead of trying to win big, you just play the range and collect all your pennies on each price swing of the stock. Like anything else in the market, there are no guarantees. Bollinger Bands can be a great tool for identifying volatility in a security, but it can also prove to be a nightmare when it comes to newbie traders. Don't skip ahead, but I will touch on this from my personal experience a little later in this article.

Not exiting your trade can almost prove disastrous as three of the aforementioned strategies are trying to capture the benefits of a volatility spike. For example, imagine you are short a stock that reverses back to the highs and begins riding the bands. What would you do? While bands do a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man's failed attempt to control the uncontrollable.

While there is still more content for you to consume, please remember one thing - you must have stopped in place! Let me help you out if you are confused - kill the trade! While bandsdo a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man's failed attempt to control the uncontrollable.

Strategy 5 - Snap back to mthe iddle band, will work in very strong markets. I have been a breakout trader for years and let me tell you that most breakouts fail. Not to say pullbacks are without their own issues, but you at least minimize your risk by not buying at the top.

Shifting gears to strategy 6 - Trade Inside the Bands, this approach will work well in sideways markets. Because you are not asking much from the market in terms of price movement. From my personal experience of placing thousands of trades, the more profit you search for in the market, the less likely you will be right. Don't worry, I'm not about to go on a history lesson on cryptocurrencies with details of where David Chaum went to college.

I was reading an article on Forbes, and it highlighted 6 volatile swings of bitcoin starting from November through March So, I wanted to do my own research and I looked at the most recent price swings of Bitcoin in the Tradingsim platform. Let's look at the period of December 22, ,to December 27, During this period, Bitcoin ran from a low of 12, to a high of 16, Let's unpack this a little further.

Do you realize that these gains were largely made over 3 days' worth of trading? I am getting a little older now and hopefully a little wiser and that kind of money that fast, I have learned is almost impossible for me to grasp.

The psychological warfare of the highs and the lows become unmanageable. So, it got me thinking, would applying bands to a chart of bitcoin futures have helped with making the right trade? I indicated on the chart where bitcoin closed outside of the bands as a possible turning point for both the rally and the selloff.

But let's be honest here, this is a minute chart of a highly volatile security. You must honestly ask yourself will you have the discipline to make split second decisions to time this trade, just right? The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin. I honestly find it hard to determine when bitcoin is going to take a turn looking at the bands.

It's not that the bands are doing anything wrong or not working. Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error. I personally do not trade bitcoin, but after looking at the most recent price swing using bands a couple of things come to mind:. Pairing the Bollinger Band width indicator with Bollinger Bands is like combining the perfect red wine and meat combo you can find.

In the previous section, we talked about staying away from changing the settings. Well, if you really think about it, your entire reasoning for changing the settings in the first place is in hopes of identifying how a security is likely to move based on its volatility.

A much easier way of doing this is to use the Bollinger Bands width. In short, the BB width indicator measures the spread of the bands to the moving average to gauge the volatility of a stock.

Well, now you have an actual reading of the volatility of a security, you can then look back over months or years to see if there are any repeatable patterns of how price reacts when it hits extremes. Still, don't believe me? Look at the below screenshot using both the Bollinger Bands and Bollinger Band width. Notice how the Bollinger Band width tested the. The other point of note is that on each prior test, the high of the indicator made a new high, which implied the volatility was expanding after each quiet period.

As a trader, you need to separate the idea of a low reading with the Bollinger Bands width indicator with the decrease in price. If you had just looked at the bands, it would be nearly impossible to know that a pending move was coming. You would have no way of knowing that. This is just another example of why it's important to pair Bollinger Bands with other indicators and not use it as a standalone tool.

The above chart is of the E-Mini Futures. I want to dig into the E-Mini because the rule of thumb is that the smart money will move the futures market which in turn driveS the cash market.

Looking at the chart of the E-mini futures, the peak candle was completely inside of the bands. Other than the fact the E-mini was riding the bands for months, how would you have known there was a big break coming? Now that I have built up tremendous anticipation, let's see if there is a way to identify an edge. Remember in Chapter 4, the Bollinger Band width can give an early indication of a pending move as volatility increases.

In the above example, the volatility of the E-Mini had two breakouts prior to price peaking. If that wasn't enough to convince you, then the second break above the 8-month swing high of the Bollinger Band width was your second sign.

After these early indications, the price went on to make a sharp move lower and the Bollinger Band width value spiked. The inspiration for this section is from the movie Teenage Mutant Ninja Turtles, where Michelangelo gets super excited about a slice of pizza and compares it to a funny video of a cat playing chopsticks with chopsticks. Does anything jump out that would lead you to believe an expanse in volatility is likely to occur? Let me tell you, when you are trading in real-time, the last thing you want to do is come late to a party.

More times than not, you will be the one left on cleanup after everyone else has had their fun. It was very subtle, but you can see how the bands were coiling tighter and tighter from September through December. During this time, the VIXY respected the middle band. There was one period in late November when the candlesticks slightly jumped over the middle line, but the candles were red and immediately rolled over.

However, in late January, you can see the candlesticks not only closed above the middle line, but also started to print green candles. Now, one could argue that this wasn't enough information to make a trading decision. That is a fair statement. You would need a trained eye and have a good handle with market breadth indicators to know that this was the start of something real. There is the obvious climactic volume which jumps off the chart, but there was a slight pickup in late January, which was another indicator that the smart money was starting to cash in profits before the start of spring break.

This gives you an idea of what topics related to bands are important to other traders according to Google. Why is this important? It's safe to say bands is probably one of the most popular technical indicators in any trading platform. If memory serves me correctly, Bollinger Bands, moving averages and volume were likely my first taste of the life.

Well as of today, I no longer use bands in my trading. That doesn't mean they can't work for you, but my trading style requires me to use a clean chart. Therefore, the more signals on the chart, the more likely I am to act in response to said signal. This is where the bands expose my trading flaw. For example, if a stock explodes above the bands, what do you think is running through my mind?

You guessed right, sell! The stock could just be starting its glorious move to the heavens, but I am unable to mentally handle the move because all I can think about is the stock needs to come back inside of the bands. Instead of taking the time to practice, I was determined to turn a profit immediately and was testing out different ideas. I decided to scalp trade. I would sell every time the price hit the top bands and buy when it hit the lower band.

It's really bad, I know. From what I remember, I tried this technique for about a week, and at the end of this test, I had made Tradestation rich with commissions. The key flaw in my approach is that I did not combine bands with any other indicator.

This left me putting on so many trades that at the end day, my head was spinning. Flashback to , when I was just starting out in day trading; I had no idea what I was doing.

One of the first indicators I put to the test was Bollinger Bands. It's one of the most popular indicators. Al Hill Click to tweet. At the end of the day, bands are a means for measuring volatility.





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