Bollinger Bands Indicator

This is one of the more popular indicator tool used in trading as it has shown its reliability by yielding accurate results and signals. The Bollinger Bands is described as a dynamic indicator as it can adjust and adapt to new market conditions and get shaped as prices change. It is also responsible for measuring momentum and market volatility. 

It is best used, though, in analyzing the strength of a trend and yield significant information relative to the market trend. 

How Bollinger Bands works

This indicator tool operates using three moving averages:

Upper Band – 20-day simple moving average + double standard deviation

Middle Band – 20-day simple moving average

Lower Band – 20-day simple moving average – double standard deviation

When the distance between the upper bands and the smaller bands increases as the volatility grows, it gives traders a signal that price is developing in a particular trend. The Middle line’s direction correlates with the direction of the developing price.

The signal that this tool gives to the trader of when to buy or to sell in when the price crosses the Middle line from above or below.

Trading Strategy using the Bollinger Bands

The upper bands and the lower bands used as price targets are known as the best way to utilize Bollinger Bands as a trading strategy. The upper band serves as the upper price target when the prices go below the Middle line, whereas the lower band becomes the lower price target when the prices go above the Middle line.

During a downtrend, prices typically play between the Middle line and the lower band. Prices that go above the Middle line are an indication of a reversal in trend to the upside, which suggests a “buy” signal to the trader. 

Formula:

The Middle line is a regular Moving Average:

ML = SUM [CLOSE, N] /N

The Top Line is ML a deviation higher:

TL = ML + (D*StdDev)

The Bottom line is ML a deviation lower

BL = ML – (D*StdDev)

Where:

N – Number of periods used in calculation;

ML – simple Moving Average

StdDev – Standard Deviation

Risk disclaimer "Market Solutions Ltd – Suite 305 Griffith Corporate Centre P.O. Box 1510 Beachmont, Kingstown, St Vincent and the Grenadines is a financial services institution outside the European Union Area, which is subject to the supervision of the IFMRRC Certificate 0395 AA V0128 Trading in Forex/ CFDs and Other Derivatives is highly speculative and carries a high level of risk. It is possible to lose all your capital. 70% of trading deals can be unprofitable. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent advice if necessary. Speculate only with funds that you can afford to lose. This Website may contain information in particular regarding financial services and products that could be regarded b a E.U. supervisory authority as an offer of financial services targeted in Europe. ESMA intervention measures do not apply to customers of Market solutions Ltd and it is your responsibility to choose a company which is most suitable for your trading needs. By clicking continue you confirm that you have read, understood and agree to the risk disclosures, terms of service, cash policies, privacy policies and this notice and that you are visiting this website on your own initiative, without any encouragement whatsoever from Umarkets.com or Market Solutions limited." Cookies notification: “We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we assume that you are happy with it. Continue
×

Help with deposit?