Bollinger Bands indicator is Little look like ATR bands indicator. In this article, we will learn, an overview of this indicator, how to use this indicator, Calculation, trading strategies, and conclusion. I will try to write in short and simple words. so, read carefully this article.
This indicator shows overbought, the oversold zone also supports and resistance zone by two bands( upper band and lower band). The upper line is the resistance zone and the lower line is the support zone. Similarly, the upper line is the overbought zone and the lower line is the oversold zone.
This indicator has three lines (middle line, upper line, lower line). The middle line is the average price of the stock. the upper and lower line is standard deviations distance from moving averages.
Bollinger bands indicator Setting
Go to the indicator section and search for “Bollinger Bands”
Lets Discuss all options
Field: The default setting is “close” this means, moving average will be calculated by using the closing price. you can change the closing price to opening price, high low, etc, etc.
- Period: 20 periods means 20 candle calculations. if you set each candle one day candle. then 20 periods means 20 days calculation.
- Standard Deviations: in simple word distance from moving average line. here 2 means, 2-times distance from moving average to both sides (upper side and lower side).
- Moving Average Type: “Simple” means, the simple moving average. Click on “simple” full list will dropdown. Simple, exponential, time series, triangular, variable, VIDYA, Weighted, Welles Wilder, Hull all these are types of moving averages.
- Channel fill: This is the channel color enable/disable option. Channel means a gap between the upper band and the lower band. Check uncheck this option to enable and disable channel color.
- Bollinger bands top: this one is the upper line color of the band. Red selected here. You can change it.
- Bollinger bands median: This middle line and channel color. If you change middle line color then channel color also changed with this. The above charts I selected its black color.
- Bollinger bands bottom: This is the band’s lower line color. Green color I set it green color in the above chart.
Bollinger bands indicator calculation
Above the chart, you have seen 3 lines ( Upper Line, middle line, and Lower Line) in this indicator,
So here the middle line is ‘simple moving averages’. as I selected period 20. this means the middle line is 20 periods simple moving average line. you can change its simple moving average line to exponential moving average line. to change this click on ‘moving average type’ and change it to the exponential moving average, time series, and many other types of moving averages.
Upper Line = 20 period SMA + (20 period standard deviation of the price ✕ 2)
As i selected above chart period=20, and moving average type= simple, and standard deviations=2.
Lower Line =20 period SMA – (20 period standard deviation of the price ✕ 2).
If you choose 1 day’s time frame chart( which means 1 candle show 1 days data) then 20 Periods= 20 days.
Bollinger bands indicator trading strategy
This indicator basically measures volatility. if this indicator is narrow this means the stock is less volatile and wider means the share price is much volatile.
** You can buy a stock when stock price touch ‘lower band‘ & sell when stock touch ‘upper band‘ because lower band means support zone and upper band means resistance zone. but this will not work every time. so that using the MACD indicator with this can give good results. If the MACD indicator gives confirmation with Bollinger bands that will be more reliable. wait for somedays I will write an article combination of Bollinger Bands and MACD indicator. One of the best combinations as my experience using both.**
What happened if I set 1 as standard deviations? This is the distance from the middle line. and if I set 1 multiple then the upper and lower band will too much close to the middle line and stock will trade outside the bands.
And if you set 5 multiple of standard deviations then the stock will trade not touch bands and so much gap. So that’s why choosing perfect standard deviations no for stock that will help to trade using Bollinger band indicator. Generally standard deviations 2 is good for most of the stocks but if stocks are too much volatile then you can increase this number to adjust with volatility.
Bollinger bands indicator is a good indicator with the conjunction of the MACD indicator. but if you use only Bollinger bands indicator that will not useful for trading because some time lower band oversold formula and upper band mean overbought formula may not work but with confirmation of MACD line will help you understand whether buy or not.
*Read the related article for more information.