Technical analysis focuses on market action — specifically, volume and price.

Bollinger Bands Trading Strategy Rules

Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation.

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Why Fidelity. Home » Research » Learning Center ». Print Email Email. Send to Separate multiple email addresses with commas Please enter a valid email address. You only want to trade this approach when prices trendless. Avoid trading the Bollinger Bounce when the bands are expanding , because this usually means the price is not moving within a range but in a TREND!

Instead, look for these conditions when the bands are stable or even contracting. When the bands squeeze together, it usually means that a breakout is getting ready to happen. Looking at the chart above, you can see the bands squeezing together. The price has just started to break out of the top band.

Based on this information, where do you think the price will go? There are many other things you can do with Bollinger Bands, but these are the two most common strategies associated with them.

Go ahead and add the indicator to your charts and watch how prices move with respect to the three bands. The man who never makes a mistake always takes orders from one who does. Daisy Bates. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Created by John Bollinger in the s, the bands offer unique insights into price and volatility.

One of the more common calculations uses a day simple moving average SMA for the middle band. The upper band is calculated by taking the middle band and adding twice the daily standard deviation to that amount.

Profitable Bollinger Band Trading Strategies for FX Markets

The lower band is calculated by taking the middle band minus two times the daily standard deviation. On the other hand, when price breaks above the upper band, the market is perhaps overbought and due for a pullback. Mean reversion assumes that, if the price deviates substantially from the mean or average, it eventually reverts back to the mean price. In range-bound markets, mean reversion strategies can work well, as prices travel between the two bands like a bouncing ball. During a strong trend, for example, the trader runs the risk of placing trades on the wrong side of the move because the indicator can flash overbought or oversold signals too soon.

To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend. For example, if the trend is down, only take short positions when the upper band is tagged. The lower band can still be used as an exit if desired, but a new long position is not opened since that would mean going against the trend.

As John Bollinger acknowledged, "tags of the bands are just that, tags, not signals. Price often can and does "walk the band. Therefore, the bands naturally widen and narrow in sync with price action , creating a very accurate trending envelope. Returning to the chart above, we can see how trend traders would position long once price entered the "buy zone.

The reason for the second condition is to prevent the trend trader from being "wiggled out" of a trend by a quick move to the downside that snaps back to the "buy zone" at the end of the trading period. Note how, in the following chart, the trader is able to stay with the move for most of the uptrend , exiting only when price starts to consolidate at the top of the new range.

Bollinger band trading rules -

Note, however, that counter-trend trading requires far larger margins of error, as trends will often make several attempts at continuation before reversing. As for the stop-loss points, putting the stop just above the swing high will practically assure the trader is stopped out, as the price will often make many forays at the recent top as buyers try to extend the trend. By using the volatility of the market to help set a stop-loss level, the trader avoids getting stopped out and is able to remain in the short trade once the price starts declining.

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