The Ultimate Guide

How To Use Bollinger

Bands To Generate
Trading Signals -
Hantec Markets
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retail investor accounts lose money when trading CFDs
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CFDs work and whether you can afford to take the high
risk of losing your money.

CFDs are complex instruments and come with a high

risk of losing money rapidly due to leverage. 71.01% of
retail investor accounts lose money when trading CFDs
with this provider.

You should consider whether you understand how

CFDs work and whether you can afford to take the high
risk of losing your money.

CFDs are complex instruments and come with a high

risk of losing money rapidly due to leverage. 71.01% of
retail investor accounts lose money when trading CFDs
with this provider.

You should consider whether you understand how

CFDs work and whether you can afford to take the high
risk of losing your money.

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The Basic Understanding of

Bollinger Bands
This popular form of technical price indicator is
capable of highlighting areas of support and
resistance. We'll show you how to calculate it using
three lines drawn onto a price chart near the standard
moving average.

Bollinger Bands were invented by John Bollinger in the

early 1980s. Bollinger, a well-known technical analyst,
developed the bands as a volatility indicator for stock
prices. The bands are plotted two standard deviations
away from a simple moving average and can be used
to determine overbought and oversold levels in the
market. Bollinger Bands have since become a widely
used tool in technical analysis and are applied to
various financial markets, including equities, bonds,
and commodities.

What are Bollinger Bands?

Bollinger Bands are a technical analysis tool
consisting of a set of lines plotted two standard
deviations away from a simple moving average of a
financial instrument’s price, usually the closing price.
The basic idea behind Bollinger Bands is to measure
and quantify the volatility of a stock or other financial
instrument, which can provide traders and investors
with valuable information about the asset’s price
movements and future trends.

In the basics, Bollinger Bands consist of a middle line

(the simple moving average), and two outer lines, the
upper and lower bands, each plotted two standard
deviations away from it. The width of the bands varies
as the volatility of the asset changes, and if the asset’s
price breaches one of the outer lines, it can indicate
an overbought or oversold condition, which can be
used to identify potential entry and exit points for
trades. Additionally, Bollinger Bands can be used in
conjunction with other technical indicators, such as
moving averages and relative strength index (RSI), to
confirm trading signals.

Which parameters should be used?

Bollinger Bands are a popular technical analysis tool
that uses a simple moving average (SMA) and two
standard deviations (SD) to calculate the upper and
lower bands.

The “upper band” is calculated by adding two times

the standard deviation to the SMA. The “lower band” is
calculated by subtracting two times the standard
deviation from the SMA. These bands provide an
indication of the volatility of a security and are used
to identify potential overbought or oversold
conditions.

The parameters used in Bollinger Bands include:

SMA (Simple Moving Average): It is the average price of

the security over a specified number of periods.

SD (Standard Deviation): It is a measure of the

volatility or dispersion of the security’s price.

Time Period: It is the number of periods used in the

calculation of the SMA and SD.

Multiplier: It is the number of standard deviations

used to calculate the upper and lower bands. The
default value is 2, but it can be adjusted to suit the
needs of the trader.

Interpreting Bollinger Bands

The two standard deviations are plotted away from a
simple moving average and consist of an upper and
lower band. When the market is volatile, the bands
expand, and during less volatile periods, they contract.
Interpreting Bollinger Bands can give traders and
investors a better understanding of potential market
movements.

When the price of an asset is trading near the upper

Bollinger Band, it is considered overbought and may
indicate that the price is likely to fall. Conversely,
when the price is trading near the lower Bollinger
Band, it is considered oversold and may indicate that
the price is likely to rise. This can provide traders with
valuable information on potential trade
entries and exits.

How to trade using Bollinger bands

Trade examples using Bollinger bands.

Here are two trade examples using Bollinger Bands

with USD/JPY:

Bollinger Bands squeeze: When the USD/JPY price

moves within narrow Bollinger Bands, it signals a
potential price breakout. A trader could go long on the
pair if the price breaks above the upper Bollinger
Band, or short if the price breaks below the lower
Bollinger Band.

Bollinger Bands reversion to the mean: If the USD/JPY

price moves outside the Bollinger Bands, it may
indicate a potential reversal to the mean or middle
Bollinger Band. A trader could go long if the price is
below the lower Bollinger Band and crosses above the
mean, or short if the price is above the upper
Bollinger Band and crosses below the mean.

Example 1: Bollinger Bands squeeze

USD/JPY price: 109.00

Upper Bollinger Band: 109.50

Lower Bollinger Band: 108.50

Moving average: 109.00

A trader could go long on USD/JPY at 109.00 with a

target of 109.50 (upper Bollinger Band) and a stop loss
of 108.50 (lower Bollinger Band).

Example 2: Bollinger Bands reversion to the mean

USD/JPY price: 110.00

Upper Bollinger Band: 111.00

Lower Bollinger Band: 108.00

Moving average: 109.50

A trader could go short on USD/JPY at 110.00 with a

target of 109.50 (moving average) and a stop loss of
111.00 (upper Bollinger Band).

Note that Bollinger band strategy can be used with

price action and other technical indicators.

Trading breakout strategy using

Bollinger bands
The Bollinger Band Breakout strategy is a popular
trading technique that uses Bollinger Bands to identify
potential trading opportunities in the markets.

The basic idea behind the Bollinger Band Breakout

strategy is to buy when the price breaks above the
upper band and to sell when the price breaks below
the lower band. This signals a potential change in
market volatility and an opportunity to enter or exit a
trade.

To implement the Bollinger Band Breakout strategy,

traders typically use the 20-day moving average and 2
standard deviation lines as their default settings.
When the price breaks above the upper band, it is
considered a bullish signal and traders look to enter a
long position. Conversely, when the price breaks below
the lower band, it is considered a bearish signal and
traders look to enter a short position.

It is important to note that Bollinger Bands are not a

guarantee of future price action and should not be
used as the sole basis for a trading decision. Traders
should also consider other factors such as market
trends, economic data releases, and technical
indicators before making a trade.

Overall, the Bollinger Band Breakout strategy can be a

useful tool for traders who are looking to capitalize on
changes in market volatility and identify potential
trading opportunities.

Trading reversals using Bollinger

bands
Reversal strategy using Bollinger Bands involves
identifying trend changes in price movements by using
the bands as a tool for detecting volatility and
potential reversals in the market.

The Bollinger Bands consist of a middle band

(typically a 20-day moving average) and two outer
bands that act as price targets for the upper and lower
bounds of the market. When prices reach the upper
band, it is considered overbought, and when prices
reach the lower band, it is considered oversold.

To implement a reversal strategy using Bollinger

Bands, traders typically look for the price to reach the
upper or lower band and then wait for a confirmation
signal, such as a candlestick reversal pattern or a
move below or above the band. If the confirmation
signal occurs, they may enter a trade in the opposite
direction of the previous trend.

Range trading using Bollinger bands

Range trading is a trading strategy that involves
buying low and selling high within a defined price
range. Bollinger bands are a widely used technical
analysis tool that can aid traders in identifying the
range by showing the upper and lower bounds of price
action.

Bollinger bands vary in the number of periods used to

calculate the moving average and the standard
deviations, with 20 periods and two standard
deviations being the most common setting. The bands
adjust as prices move, expanding during periods of
increased volatility and contracting during periods of
decreased volatility.

When using Bollinger bands for range trading, traders

look for opportunities to buy at the lower band and
sell at the upper band. If prices reach the upper band,
the trader may consider selling, as prices may be
considered overbought and due for a pullback.
Similarly, if prices reach the lower band, the trader
may consider buying, as prices may be considered
oversold and due for a rebound.

In conclusion, Bollinger bands can be a useful tool for

range traders looking to identify the boundaries of
price action and make informed trading decisions
based on market conditions. However, it’s important to
note that Bollinger bands varies in the parameters
used, and traders should select a setting that best
suits their trading style and market conditions.

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