Bollinger Bands indicator is a Little look like the 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, and 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”
Let’s Discuss all options
Field: The default setting is “close” this means, the moving average will be calculated by using the closing price. you can change the closing price to the opening price, high low, etc, etc.
- Period: 20 periods means 20 candle calculations. if you set each candle for one day candle. then 20 periods means 20 days calculation.
- Standard Deviations: in simple words 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 drop down. 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 is selected here. You can change it.
- Bollinger bands median: This middle line and channel color. If you change the middle line color then the channel color also changed with this. For the above charts, I selected its black color.
- Bollinger bands bottom: This is the band’s lower line color. Green color I set it to 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 an 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 periods SMA + (20-period standard deviation of the price ✕ 2)
- As I selected the above chart period=20,
- moving average type= simple, and standard deviations=2.
Lower Line =20 periods SMA – (20-period standard deviation of the price ✕ 2).
If you choose 1 day’s time frame chart( which means 1 candle show 1 day’s 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 more volatile.
You can buy a stock when the stock price touch ‘the lower band’ & sell when the stock touch the upper band’ because the lower band means the support zone and the upper band means the resistance zone. but this will not work every time. so 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 some days I will write an article combination of Bollinger Bands and MACD indicator. One of the best combinations in my experience using both.
What happened if I set 1 as the standard deviation? This is the distance from the middle line. and if I set 1 multiple then the upper and lower band will be 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 a stock will help to trade using the Bollinger band indicator. Generally, standard deviation 2 is good for most stocks but if stocks are too volatile then you can increase this number to adjust to the volatility.
Bollinger bands indicator is a good indicator with the conjunction of the MACD indicator. but if you use only the Bollinger bands indicator that will not be useful for trading because some time lower band oversold formula and the upper band means overbought formula may not work but confirmation of MACD line will help you understand whether buy or not.
*Read the related article for more information.