Bollinger Bands: What They Are and How to Use Them

Example of a stock chart with bollinger bands.

Bollinger bands are a technical analysis tool that can be used to measure the volatility of a security. They were created by John Bollinger in the early 1980s. The bands are made up of three lines: an upper band, lower band, and median line. When prices move away from the median line, it is an indication that the volatility of the security is increasing. When prices move back towards the median line, it is an indication that volatility is decreasing.

Bollinger bands can be used by traders to identify possible entry/exit points in the market. When prices move away from the upper or lower band and start to close toward the median line, it could signify that a trend is reversing. Similarly, if prices move past the upper or lower Bollinger band and continue to stay outside of the bands, it could be an indication that the trend is still strong.

By combining Bollinger band analysis with other types of technical indicators such as moving averages, traders can gain a better understanding of where a security’s price is headed and how to best manage their positions. Traders can also use Bollinger bands to identify potential support and resistance levels, as prices that reach the lower band often rebound and those that touch the upper band tend to fall back.

Example upper and lower bands. Note the reversion pattern.

In addition to being a useful tool for traders, Bollinger bands can also be used as part of a risk management strategy. By identifying when prices move outside of their typical range, investors can adjust their positions accordingly and minimize any potential losses. It’s important to note, however, that Bollinger bands are not a predictive indicator and should be used in conjunction with other technical indicators or fundamental analysis to make better decisions.

Traders can adjust the settings of the Bollinger band – such as the period and standard deviation – to best suit their needs and strategies. Experimenting with different settings can help traders find the parameters that work best for them. That said, there is no one-size-fits-all solution and the best Bollinger band setting will depend on individual goals and objectives.

By using Bollinger bands in conjunction with other trading strategies and indicators, traders can spot potential buying or selling opportunities based on the band’s tightness or width. If a trader is looking for an entry into a position, they may consider entering when prices move outside of the upper or lower bands. Conversely, if traders are considering an exit from a long (or short) position, they may look to take profits when prices return back inside the bands.

In addition to using Bollinger bands as entry and exit points, traders can also look at the width of the bands to gauge volatility levels in a market. If the upper and lower bands are close together, this may indicate that the current volatility level is low and price movement is limited. On the other hand, if there is a large distance between the upper and lower bands, this may indicate higher volatility and increased price movement. By monitoring the width of Bollinger Bands, traders can identify changes in market conditions that could present trading opportunities.

Overall, Bollinger Bands are a valuable tool for traders to help assess potential entry and exit points as well as to gauge market volatility. By paying attention to the distance between the upper and lower bands, traders can gain insight into potential market moves before they happen. Understanding how Bollinger Bands work and how to use them effectively can help traders maximize their trading success.

There are many charting tools, not all support advanced features like Bollinger Bands. One of our favorites is TradingView.