I have researched and tested many technical tools and indicators. My goal has always been to find the ideal combination of instruments without overloading my charts. When traders use too many tools, they often get conflicting signals making it difficult to execute trades confidently. I began testing new disciplines years ago and started a journal with what I deemed the best information each indicator had to offer.
Here are some of the notes I took while learning about Bollinger bands (BB).
- Bollinger Bands are plotted above and below a simple moving average (SMA).
- The recommended moving average is 20 periods and BBs are two standard deviations above and below the SMA.
- BBs may be applied to any market and in any time frame (intraday, day, week, etc.).
- One of the primary uses of BBs is to show whether prices are or low on a relative basis, a.k.a. overbought/oversold.
- Narrow bands indicate low volatility and vice versa. This is especially helpful for option traders since option prices are heavily influenced by swings in volatility.
- Sharp vertical moves frequently occur after BBs get narrow.
- When prices move above the upper band it is a sign of great strength and when they move below the lower band it is an indication of great weakness.
- When prices move outside the bands, trend continuation is often a valid assumption.
- Bollinger preferred to use BBs in conjunction with another indicator, preferably RSI.
- RSIs are used to gauge trend strength and reversals
- BBs tend to provide support and resistance after a market reaches overbought/oversold status.
The graph below shows a few examples of the best BBs have to offer.
Senior Technical Analyst
Market Taker Mentoring, Inc.