“bollinger Bands And Volatility Strategies: Riding Profitable Trends In Australia” – Learn about the Bollinger Bands technical indicator and how it can help identify volatility and overbought/oversold conditions in stocks and indices.

Bollinger Bands is a technical analysis indicator widely used by traders and investors. Why are they so popular? Bollinger Bands are relatively simple to understand and intuitive to apply. Bollinger Bands can help measure market volatility and identify overbought or oversold conditions in stocks, indices, futures, forex and other markets. What are Bollinger Bands? Bollinger Bands are usually drawn as three lines – the middle, upper and lower bands. The middle line of the indicator is the simple moving average (SMA). Most charting software defaults to a 20-day SMA, which is usually sufficient for most investors, but you can experiment with different moving average lengths after you’ve gained some experience with Bollinger Bands. The default upper and lower bars represent two standard deviations above and below the moving average. Again, you can try different standard deviations for the ranges once you get a better feel for how they work. Figure 1 shows Bollinger Bands applied to the Russell 2000 (RUT) price chart.

“bollinger Bands And Volatility Strategies: Riding Profitable Trends In Australia”

FIGURE 1: RUSSELL 2000 (RUT) WITH BOLLINGER BANDS. The Bollinger Bands indicator applied to the RUT price chart uses a 20-day simple moving average (blue line). The top (yellow) bar represents +2 standard deviations from the moving average, and the bottom (purple) bar represents -2 standard deviations from the moving average. Chart source: thinkorswim® platform by TDAmeritrade. For illustrative purposes only. Past results do not guarantee future results.

Creating A Volatility Index With Bollinger Bands

How to use Bollinger Bands. The upper and lower bands measure volatility, or the degree to which prices change over time. Because Bollinger Bands measure volatility, the bands automatically adjust to changing market conditions. Bands tend to narrow when the index is quiet and price changes are small. At other times, the bands widen when the index becomes volatile and the changes become larger. Take a look at the chart of the Utilities Sector Index ($IXU) in Figure 2. Notice how the bands narrowed as the $IXU traded quietly, relatively flat. Then see how the ranges widened as the index experienced large price swings, down and up, over short periods of time.

FIGURE 2: ELECTIVE SECTOR EMUNAL SERVICES INDEX ($IXU) WITH BOLLINGER CAPTURES. The Bollinger Bands widened when $IXU became volatile and experienced large price swings over a short period of time. Bands narrowed as $IXU traded in a tight range. Chart source: the thinkorswimplatform by TDAmeritrade. For illustrative purposes only. Past results do not guarantee future results.

On the thinkorswim platform, open the chart of the symbol you are tracking. Then select Studies > Add Study > Top Studies > A-D > Bollinger Bands.

Overbought and Oversold It is important to understand what causes Bollinger Bands to expand and contract because many investors use Bollinger Bands to gauge when an index may be overbought or oversold. But this strategy is not reliable at all. So what is the approach? Generally, investors identify the overbought state of the Bollinger Bands when the index moves above the upper band. Conversely, the index may be oversold if it moves below the lower band. But here’s the catch: an index can remain overbought or oversold for a long period of time. For example, look at Figure 3, which shows the Philadelphia Gold and Silver Index (XAU) from July to early September 2018.

Bollinger Bands: Strategy & Formula In Trading

FIGURE 3: GOLD AND SILVER BOLLINGER INDICES (XAU). XAU broke below the lower Bollinger band in July 2018 and continued to decline until early September 2018. Chart source: the thinkorswimplatform by TDAmeritrade. For illustration only. Past results do not guarantee future results.

XAU reached an oversold condition in July 2018 when the price bars fell below the lower band. The index continued to fall for seven weeks before stabilizing and recovering, with Bollinger Bands widening in response to increased volatility. What to take away? When using Bollinger Bands to measure overbought and oversold conditions, be aware of the width of the bands. Avoid looking for overbought or oversold conditions when ranges are widening. Instead, look for these conditions where the streaks are stable or even contracting. To this point, take another look at the XAU in Figure 3 and notice how it followed the Bollinger Bands from late December 2018 to mid-January 2019 when the bands were contracting. At this time, when the XAU moved above the upper band and became overbought, it subsequently paused and retreated. There are many ways to apply Bollinger Bands to your trading. So, go ahead. Add the indicator to your charts and watch prices move relative to the three bands. And once you understand that, try changing some parameters of the indicator.

More Similar Indicator Decline: Simple vs. Exponential Moving Averages 3 min read Fibonacci Retracements: A Golden Idea (Ratio) for Trading? 4 minutes of reading. A brief overview of stock market trends using the MACD indicator. 4 minutes of reading

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Strategy Experiment #1: Directional Trading With Macd And Bollinger Bands Indicators

By clicking on this link, you will be taken away from the TDAmeritrade website to a website controlled by a third party, a separate but affiliated company. TDAmeritrade is not responsible for the content or services of this site. If you select yes, you will no longer receive this pop-up message for this link during this session.

You are now leaving the TDAmeritrade website and going to an unaffiliated third party website to access its products and published services. The third party site is governed by its published privacy policy and terms of use, and the third party is solely responsible for the content and offerings on its website. If you select yes, you will no longer receive this pop-up message for this link during this session. A pinch-off is when the Bollinger Bands narrow or “squeeze”, meaning volatility is low. Traders should be alert when the pitch for a volatility breakout and any price movements outside the bands begins. The market is waiting for the bulls or bears to take control.

Traders should be alert if the price crosses any of the bands. When a price change passes through an average band it can indicate a trend change, we know this because the average band is a moving average and we discussed how MAs are used to define a trend in our Moving Averages Explained course.

When the price moves outside the upper or lower band, it is called a tag, and it indicates the strength or weakness of the price.

Bollinger Bands® Trading Strategies + Video

These are definitely not trading signals, but important tags to look out for in a bullish trend when the price drops below the lower band and in a bearish trend when it moves above the upper band. These are signs of trend weakness.

Many traders use Bollinger Bands to help identify dynamic support and resistance levels, they work best over longer periods of established trends.

As with all indicators, usage alone does not provide a complete picture of the market. Understanding volatility is important, and there aren’t many other indicators that help us do this as easily as Bollinger Bands. When used with other indicators and technical analysis methods, it is a really useful tool.

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How To Profit From The Bollinger Squeeze

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