Bollinger Bands are a powerful technical analysis tool that every trader should understand. This guide covers everything from the basics of Bollinger Bands to advanced strategies for improving your trading performance.
Understanding Bollinger Bands
What Are Bollinger Bands?
Bollinger Bands consist of three components:
- Middle Band (Simple Moving Average - SMA): A 20-period moving average serving as the baseline.
- Upper Band: SMA + (2 × Standard Deviation).
- Lower Band: SMA – (2 × Standard Deviation).
These bands dynamically adjust to market volatility—widening during high volatility and narrowing during low volatility.
Key Bollinger Band Formulas
Bollinger Band %b Formula
The %b formula measures a price's position relative to the bands:
%b = (Current Price – Lower Band) / (Upper Band – Lower Band)
Interpretation:
- %b > 1: Price is above the upper band (overbought).
- %b < 0: Price is below the lower band (oversold).
Standard Deviation
Standard deviation quantifies price volatility:
- Low deviation: Prices cluster near the SMA (stable market).
- High deviation: Prices are widely dispersed (volatile market).
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Calculating Bollinger Bands
In Excel
Use these formulas:
| Component | Formula |
|-------------------------|---------------------------------------------|
| Simple Moving Average | =AVERAGE(Price_Range) |
| Upper Band | =SMA + (2 × STDEV.P(Price_Range)) |
| Lower Band | =SMA – (2 × STDEV.P(Price_Range)) |
In MetaTrader 4
Add the Indicator:
- Insert > Indicators > Trend > Bollinger Bands.
Adjust Settings:
- Period: Default is 20 (adjust based on strategy).
- Deviations: Default is 2 (higher values widen bands).
Bollinger Bands vs. Envelopes
| Feature | Bollinger Bands | Envelopes |
|----------------|----------------------------------|-------------------------------|
| Calculation | SMA ± (2 × Standard Deviation) | SMA ± Fixed Percentage (%) |
| Use Case | Volatility-based signals | Trend-following boundaries |
Advanced Bollinger Band Strategies
The Squeeze
A Bollinger Squeeze occurs when bands narrow significantly, signaling low volatility—often preceding a breakout.
BandWidth Indicator
BandWidth = (Upper Band – Lower Band) / Middle Band
- <0.2: Oversold (potential reversal).
- >0.8: Overbought (caution needed).
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Practical Trading Tips
Trend Identification:
- Prices hugging the upper band = Uptrend.
- Prices near the lower band = Downtrend.
Reversal Signals:
- After touching a band, watch for price rejection (e.g., a bearish candle at the upper band).
Combine with Other Indicators:
- Use RSI or MACD to confirm overbought/oversold conditions.
FAQs
How do I avoid false signals with Bollinger Bands?
Focus on price action confirmation (e.g., candlestick patterns) and avoid trading solely on band touches.
What’s the best time frame for Bollinger Bands?
Daily charts for swing trading; hourly for intraday. Adjust based on your strategy.
Can Bollinger Bands predict price targets?
No—they gauge volatility, not direction. Use them alongside trend analysis.
Final Thoughts
Bollinger Bands are versatile tools for measuring volatility, spotting trends, and identifying potential reversals. By mastering their calculations and applications, you can significantly enhance your trading edge.
Ready to apply Bollinger Bands? Start by testing these strategies in a demo account!