Bollinger Bands Strategy - How To Trade The Bollinger Squeeze

Bollinger Bands is a tool invented by John Bollinger in the s as well as a term trademarked by him in Bollinger Bands are a volatility indicator similar to the Keltner channel. Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average , but other types of averages can be employed as needed.

Exponential moving averages is a common second choice. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. In Spring, , John Bollinger introduced three new indicators based on Bollinger Bands.

Writing upperBB for the upper Bollinger Band, lowerBB for the lower Bollinger Band, and last for the last price value:. Bandwidth tells how wide the Bollinger Bands are on a normalized basis. Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:. Uses for bandwidth include identification of opportunities arising from relative extremes in volatility and trend identification. The use of Bollinger Bands varies widely among traders.

Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. When the bands lie close together, a period of low volatility is indicated. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action.

In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility.

Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.

Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results. A paper from uses Bollinger Bands to reduce variance in a Monte Carlo simulation used to forecast the Canadian treasury bill yield curve.

Bollinger Bands [ChartSchool]

Companies like Forbes suggest that the use of Bollinger Bands is a simple and often an effective strategy but stop-loss orders should be used to mitigate losses from market pressure. Security price returns have no known statistical distribution [ dubious — discuss ] , normal or otherwise; they are known to have fat tails , compared to a normal distribution.

Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices. Just the opposite is true; it is well recognized by practitioners that such price series are very commonly serially correlated [ citation needed ] —that is, each price will be closely related to its ancestor "most of the time".

Adjusting for serial correlation is the purpose of moving standard deviations , which use deviations from the moving average , but the possibility remains of high order price autocorrelation not accounted for by simple differencing from the moving average. For such reasons, it is incorrect to assume that the long-term percentage of the data that will be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount.

Practitioners may also use related measures such as the Keltner channels , or the related Stoller average range channels, which base their band widths on different measures of price volatility, such as the difference between daily high and low prices, rather than on standard deviation. In a paper published in by the Society of Photo-Optical Engineers, "Novel method for patterned fabric inspection using Bollinger bands", Henry Y.

Ngan and Grantham K. Pang present a method of using Bollinger bands to detect defects anomalies in patterned fabrics. The International Civil Aviation Organization is using Bollinger bands to measure the accident rate as a safety indicator to measure efficacy of global safety initiatives. From Wikipedia, the free encyclopedia.

%B Indicator [ChartSchool]

The Complete Resource for Financial Market Technicians by Charles D. Kirkpatrick and Julie R. A Complete Solution to Mastering Technical Systems and Trading Psychology. Applied Financial Economics Letters. An Examination of the Random Walk Model and Technical Trading Rules". Quarterly Journal of Business and Economics. Bollinger Bands and the ADX".

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