Bollinger Bands®


The single biggest mistake that many Bollinger Band novices make is that they sell the stock when the price touches the upper band or buy when it reaches the lower band. Look at the below screenshot using both the Bollinger Bands and Bollinger Band width. As such, they can be used to determine if prices are relatively high or low. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade.

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Bollinger Bands Overview. I know what you are thinking,

However, the reaction highs are not always equal. The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs.

This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal.

Final confirmation comes with a support break or bearish indicator signal. The stock moved above the upper band in April. There was a pullback in May and then another push above Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band. The M-Top was confirmed with a support break two weeks later. Also, notice that MACD formed a bearish divergence and moved below its signal line for confirmation.

Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the day SMA middle Bollinger Band , the stock moved to a higher high above Despite this new high for the move, price did not exceed the upper band. This flashed a warning sign. The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak blue arrow. This evolving top formed a small head-and-shoulders pattern.

Moves above or below the bands are not signals per se. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. Momentum oscillators work much the same way. Overbought is not necessarily bullish. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Think about it for a moment. The upper band is 2 standard deviations above the period simple moving average. It takes a pretty strong price move to exceed this upper band.

An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. The day SMA sometimes acts as support. In fact, dips below the day SMA sometimes provide buying opportunities before the next tag of the upper band.

First, notice that this is a strong surge that broke above two resistance levels. A strong upward thrust is a sign of strength, not weakness. Trading turned flat in August and the day SMA moved sideways. Prices and the day SMA turned up in September. Overall, APD closed above the upper band at least five times over a four month period. Dips below are deemed oversold and moves back above signal the start of an oversold bounce green dotted line. The upper band tag and breakout started the uptrend.

CCI then identified tradable pullbacks with dips below This is an example of combining Bollinger Bands with a momentum oscillator for trading signals. Chart 7 shows Monsanto MON with a walk down the lower band. The stock broke down in January with a support break and closed below the lower band. From mid-January until early May, Monsanto closed below the lower band at least five times. Notice that the stock did not close above the upper band once during this period.

The support break and initial close below the lower band signaled a downtrend. This system triggered two good signals in early As such, they can be used to determine if prices are relatively high or low. Technically, prices are relatively high when above the upper band and relatively low when below the lower band. However, relatively high should not be regarded as bearish or as a sell signal.

Learn similarities and differences. If the price pulls back within the uptrends, and it stays above the middle band and moves back to the upper band, that indicates a lot of strength. Generally, a price in the uptrend should not touch the lower band, and if it does, it is a warning sign for a reverse or that the stock is losing strength. Most technical traders Equity Trader An equity trader is someone who participates in the buying and selling of company shares on the equity market.

Similar to someone who would invest in the debt capital markets, an equity trader invests in the equity capital markets and exchanges their money for company stocks instead of bonds. Bank careers are high-paying aim to profit from the strong uptrends before a reversal occurs.

Once a stock fails to reach a new peak, traders tend to sell the asset at this point to avoid incurring losses from a reversed trend. Technical traders monitor the behavior of an uptrend to know when it shows strength or weakness, and use this as an indication of a possible trend reversal.

Bollinger Bands can be used to determine how strongly an asset is falling and when it is potentially reversing to an upside trend. In a strong downtrend, the price will run along the lower band, and this shows that selling activity remains strong.

But if the price fails to touch or move along the lower band, it is an indication that the downtrend may be losing momentum. When there are price pullbacks highs , and the price stays below the middle band and then moves back to the lower band, it is an indication of a lot of downtrend strength.

In a downtrend, prices should not break above the upper band since this would indicate that the trend may be reversing, or it is slowing. Many traders avoid trading during downtrends, other than looking for an opportunity to buy when the trend begins to change. The downtrend can last for short or long durations — either minutes, hours, weeks, days, months or even years.

Investors must identify any sign of downtrends early enough to protect their investments. If the lower bands show a steady downtrend, traders must be cautious to avoid entering into long trades that will proe unprofitable. Bollinger Bands use W patterns to identify W-Bottoms when the second low is lower than the first low but holds above the lower band. It occurs when a reaction low forms close to or below the lower band. The price then pulls back towards the middle band or higher and creates a new price low that holds the lower band.

When the price moves above the high of the first pullback, the W-button is in place as shown in the figure below, and indicates that price will likely rise to a new high. In its basic form, an M-Top is similar to a Double Top chart pattern. An M-Top occurs when there is a reaction that moves close to or above the upper band. The price then pulls back towards the middle band or lower and creates a new price high, but does not close above the upper band.

If the price then moves below the low of the prior pullback, the M-Top is in place as shown in the figure below. Although Bollinger Bands are helpful tools for technical traders, there are a few limitations that traders should consider before using them. One of these limitations is that Bollinger Bands are primarily reactive, not predictive.

The bands will react to changes in price movements, either uptrends or downtrends, but will not predict prices.

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