Bollinger Bands Indicator
Bollinger Bands indicator is a type of technical analysis tool designed for the sole purpose of trading stocks by John Bollinger in the 1980s.
The bands consist of a moving signal that estimates the proximate high or low of a trade’s price about its prior trades. The volatility of the trades is estimated using standard deviation, which alters with each rise and fall of the volatility. The band expands when there is a price increase, and it contracts when there is a price decrease; like other momentum indicators it can can be used in different types of trades.
The Bollinger bands are made up of 3 lines, which are the upper, middle, and lower bands. The middle band is known to be the moving average, and the parameters of this moving average are selected by the trader. The lower and upper bands are situated on both sides of the moving average band; trader determines at what particular number the standard deviation should be fixed at. The standard deviation numbers specify the length between the middle band and the lower and upper bands. The situation of these bands gives knowledge on how powerful the trend is and it also shows the possible high and low price levels that should be reached in the immediate future.
Day trading bullish trends
Bollinger Bands can be employed in the specification of how powerful a trade is increasing while potentially reversing or weakening. If a bullish trend is strong, it will often get to the upper band. When a bullish trend touches the upper band it signals that the stock is increasing higher and it’s time for traders to take advantage of the opportunity by going long. If the price decreases within the bullish trends, and remains above the middle band, and then increases back to the upper band, it indicates a strong uptrend. When a price is said to be bullish, it shouldn’t touch the lower band, and if and when it does, it goes to show that the stock is losing strength or reversing.
Many technical traders strive to earn from the strong bullish trends right before a reversal happens. Once a stock ceases to attain its peak, traders begin to sell the asset at that point to prevent loss for funds from a reversed trend.
Day trading bearish trends
Bollinger bands are also used to deduce the intensity with which a trade decreases and also to ascertain when it is likely to reverse to a bullish trend.
During a strong downtrend, the price runs along with the lower band, and it depicts that the selling activity is still strong. But then the price doesn’t touch or move near the lower band, it shows that the downtrend is losing strength. During a bearish trend, prices aren’t supposed to move above the upper band, because that would signal a price reversal trend.
Limitations of Bollinger bands
Albeit the Bollinger Bands are valuable tools for technical analysis, there are few limitations every trader should analyze before employing them. They are as follows:
- Bollinger bands are mainly reactive, and not predictive. This means that the bands only react to price alterations, either bullish or bearish. Just like most technical indicators, Bollinger bands are slow indicators. This is because the technical tool device relies on a simple moving average, which receives the average price of many price bars. Although the bands can be used by traders to gauge the trends, they shouldn’t be used alone by them to predict price movements. The founder himself of the Bollinger bands, John Bollinger, proposes to incorporate other two or three technical tools to help give a clear and concise prediction of market signals to who is investing.
- The second limitation of this Indicator is that the default settings will not always work for traders. The accuracy of Bollinger Bands may vary from one trade to another, and its settings might need some adjustments even though the trader is operating on the same stock over some time. This is why is important to find the settings panel that enable traders to adjust the parameters for a particular stock that they’re monitoring. If the chosen settings of the Indicator are not reliable, traders should change the parameters or look for another tool that best suits their trading strategy.
