Kirkpatrick and Julie R.
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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.
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.
Their results indicated that by tuning the parameters to a particular asset for a particular market environment, the out-of-sample trading signals were improved compared to the default parameters. Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices.
This is a textbook example of what the strategy is looking for. While the price move was not major, this example serves to highlight the conditions that the strategy is looking to profit from. For related reading, see Profiting From The Squeeze. Figure 2 Chart by StockCharts.
Following the strategy, technical traders would enter their buy orders for NYX on June This is the ideal scenario that the strategy is looking to capture. Opening a position on June 13 allowed traders to enter right before the turnaround. The strategy called for an immediate buy of the stock the next trading day. Figure 3 Chart by StockCharts. While everyone else was selling, the strategy calls for a buy. That proved correct, as Yahoo soon turned around.
On December 26, Yahoo again tested the lower band, but did not close below it. This would be the last time that Yahoo tested the lower band as it marched upward toward the upper band.
Riding the Band Downward As we all know, every strategy has its drawbacks and this one is definitely no exception. In the following examples, we'll demonstrate the limitations of this strategy and what can happen when things do not work out as planned. When the strategy is incorrect, the bands are still broken and you'll find that the price continues its decline as it rides the band downward.
Unfortunately, the price does not rebound as quickly, which can result in significant losses. In the long run, the strategy is often correct, but most traders will not be able to withstand the declines that can occur before the correction.
The selling pressure was clearly in oversold territory. The strategy called for a buy on the stock the next trading day. Like the previous examples, the next trading day was a down day; this one was a bit unusual in that the selling pressure caused the stock to go down heavily.
The selling continued well past the day the stock was purchased and the stock continued to close below the lower band for the next four trading days. Finally, on March 5, the selling pressure was over and the stock turned around and headed back toward the middle band. Unfortunately, by this time the damage was done.
Figure 4 Example 5: Figure 5 Chart by StockCharts. The next day, the stock made a move to the downside. This is case where the selling continued in the face of clear oversold territory. During the selloff there was no way to know when it would end.
Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because the standard deviation formula also uses a simple moving average.
When using Bollinger Bands®, designate the upper and lower bands as price targets. If the price deflects off the lower band and crosses above the day average (the middle line), the upper band. Usually the same period is used for both the middle band and the calculation of standard deviation. Bollinger registered the words "Bollinger Bands" as a U.S. trademark in Purpose. The purpose of Bollinger Bands is to provide a relative definition of high and low prices of a market. Bollinger on Bollinger Bands. McGraw Hill,
I created this post to help people learn six highly effective Bollinger Bands trading strategies they could start using immediately. They are calculated as two standard deviations from the middle band. Bollinger Bands Calculation: "Bollinger on Bollinger Bands.". Forex Trading Strategy For Trading The Middle Bollinger Band This is a forex trading strategy for trading the middle bollinger band indicator. There are 3 lines in a bollinger band indicator, the upper line, the middle line and the lower line.
This is A Simple Forex Trading Strategy. The Middle Bollinger Band Forex Trading Strategy Can Also Be used As A forex scalping system. Oct 18, · Is this the correct code to get the value of the Middle Bollinger Band.