Bollinger Bands

Bollinger Bands are a great trading tool because they provide a lot of information in one
indicator. Basically, the Bollinger Bands can help you with the three following things:

#1 Measuring volatility
#2 Identifying bottoms and tops
#3 Signaling the strength of a trend

Bollinger Bands and volatility What is volatility?

Now When we analyze volatility we have to know what it is and most traders make the mistake
that they think volatility shows the strength of a trend.

Volatility describes how much price moves up and down in relation to the average price. So if
you see a lot of candles with wicks to both sides, volatility is high. And when you see the
candles trending smoothly only in one direction without wicks, volatility is low. However, you can
also have a trending price move with high volatility.

It is important that you understand what volatility is and that volatility is no strength of a price
movement.

The center of the Bollinger Bands is the 20-period moving average and the perfect addition to
the volatility based outer bands. Then you have your lower and upper band which is seen above,
notice how price stays inside of each band with other technical confirmations this indicator can
help define entry points in a trending market such as the one above
If you notice when the market is in more of a trend they're far apart from each other and it looks
as if they hold the price to go up or down and you can see when the get closer to each other the
market plays more in a sideways range.

You notice with the Bollinger bands that when the market is moving a direction whether it be up
or down, both outer and lower bands will be separated farther apart from each other and as they
get closer to each other the market will be in more of a sideways (range).

This is all apart of a trend and how price moves, we should know by now that the market moves
in 3 types of waves being either 1 – trending 2 - sideways 3 – reversing.

Until the trend starts to reverse from bearish to bullish during each impulse we can see that the
price is closer to the outer band, then once reversing during each impulse the candlesticks are
touching the upper band and failing to reach the lower

Not sure what an impulse is? Please check section 3 on the

matrix section.
The moving average turns into a moving resistance and above is where you can see how the trend starts
to reverse fully, we can also add other small technicals on here to find more trades, like the couple trend
lines placed during the bearish trend.

 Notice how each trend line once broken price continues the downtrend

From 1-2 in the next screenshot down below we can see and nice uptrend forming higher highs. And if
you look at the MACD from 1-2 we can see more bullish bars forming meaning there’s good momentum
upwards.

From 1-2 we can look at the Bollinger bands as if they are forming a channel upwards, they look as if the
price is hanging in between them kind of like support and resistance.

At 2 price is starting to lose momentum and the bands start to contract closer together in a flat sideways
market.

There are just a few things you need to pay attention to when it comes to using Bollinger Bands to
analyze trend strength: as well as the moving average clearly crossing over price

 During strong trends, price stays close to the outer band

 If price pulls away from the outer band as the trend continues, it shows fading momentum
 Repeated pushes into the outer bands that don’t actually reach the band show a lack of
power

• A break of the moving average is often the signal that a trend is ending
Couple concepts happening here in this trend, we can look at the MACD and see how each time the two
lines ( MACD and signal ) cross over we see price pull back lower before it goes up. I also added a couple
trendlines just for confirmation on the breakout.

Nearing the end of the trend where it start to lose momentum we see the lows of the trend start to
touch the outer band a lot more than it did threw out the whole trend.
Finding tops and bottoms with Bollinger Bands

After setting your Bollinger Bands to 2.5 standard deviations, you will see that price reaches the outer
bands less often. At the same time, the meaning of such signals becomes much more important because
it shows significant price extremes.

A really good recommendation is by combining the Bollinger Bands with the RSI indicator – it’s the
perfect match. There are two types of tops that you need to know about:

1-2) Price spikes into the outer Bollinger Bands which get rejected immediately >> Reversal signal

3) After a trend move, price fails to reach the outer Band as the trend becomes weaker. This signal is
usually accompanied by an RSI divergence = Continuation signal

If you notice we've added some indicators for multiple confirmation purposes, like any indicator, we can
add other technical approaches to find the best signal
During trends, the moving average holds very accurately and a break of that moving average is usually a
meaningful signal that the trend has shifted. The screenshot below shows nicely how price trended
between the outer bands and the moving average both on the way up and down. During the trend, the
moving average could have been used as a re-entry signal to add to existing positions during pullbacks.

the moving average can be used as a trade exit signal where a trader does not close his or hers existing
positions unless price has broken the moving average.

The Bollinger bands are based on moving averages. In the middle of the Bollinger Bands, you find the 20
period moving average and the outer Bands measure price volatility. During ranges, price fluctuates
around the moving average, but the outer Bands are still very important.

When price touches the outer Bands during a range, it can often foreshadow the reversal into the
opposite direction.

During trends, Bollinger Bands can help you stay in trades. During a strong trend, price usually pulls
away from its moving average, but it moves close to the outer Band. When price then breaks the moving
average again, it signals a change in direction