What Are Bollinger Bands? - Fidelity (2024)

FAQs

What do Bollinger Bands tell me? ›

By combining a moving average with a measure of price volatility, Bollinger Bands offer insights into potential price reversals, overbought or oversold conditions, and market volatility. Remember that no single indicator can guarantee successful trading outcomes.

Bollinger bands can be used on multiple timeframes, ranging from minutes, hours, days and weeks. The common timeframes are daily for short-term traders and weekly for longer-term traders.

Bollinger Bands are one of those tools. But they work even better when you use them with something called the Moving Average Convergence Divergence (MACD) indicator. Think of the MACD indicator as a sidekick to Bollinger Bands. When they work together, they can give even better hints about when to make a trade.

Bollinger Band^® Width

This technical indicator provides an easy way to visualize consolidation before price movements (low bandwidth values) or periods of higher volatility (high bandwidth values).

Trading breakout strategy using Bollinger bands

The basic idea behind the Bollinger Band Breakout strategy is to buy when the price breaks above the upper band and to sell when the price breaks below the lower band.

A common approach when using Bollinger Bands® is to identify overbought or oversold market conditions. When the price of the asset breaks below the lower band of the Bollinger Bands®, prices have perhaps fallen too much and are due to bounce.

Limitations Of Bollinger Bands

One of these limitations is that the Bollinger Bands are essentially reactive, not predictive. The bands will react to fluctuations in price movements, either uptrends or downtrends, but will not predict prices. Like most technical indicators, Bollinger Bands are a lagging indicator.

Profitable Bollinger Bands Strategy Settings

According to our testing, the only way to trade Bollinger Bands successfully is to use settings (10, 1.5, 2) and buy when the lower band exceeds the price. This means using a 10-day simple moving average and a 1.5 and 2 standard deviation for the upper and lower bands.

By setting the upper and lower bands two standard deviations away from the SMA, Bollinger Bands create a range expected to contain approximately 95% of the security's price movements over a given period.

Combining Bollinger Bands with Other Technical Indicators

Traders can enhance the effectiveness of Bollinger Bands by combining them with other technical indicators. Some popular complementary indicators include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator.

What is the standard setting for Bollinger Bands? ›

The default values are 20 for period, and 2 for standard deviations, although you may customize the combinations. Bollinger bands help determine whether prices are high or low on a relative basis. They are used in pairs, both upper and lower bands and in conjunction with a moving average.

Formula and calculations

Bollinger bands involve the following calculations: Middle Band: 30 Day moving average. Upper Band: Middle Band + 2 x 30 Day Moving Standard Deviation. Lower Band: Middle Band – 2 x 30 Day Moving Standard Deviation.

Bollinger Band analysis holds that a failure of RSI to touch the upper band on a second try generates a sell signal. At extreme lows, a failure of RSI to reach the lower band triggers a buy signal. This is similar to double top and double bottom patterns, respectively, that can occur for the price.

If the price pulls back within the uptrends, and it stays above the middle band and moves back to the upper band, that indicates a lot of strength. Generally, a price in the uptrend should not touch the lower band, and if it does, it is a warning sign for a reverse or that the stock is losing strength.

The relative strength index is among the most popular technical indicators for identifying overbought or oversold stocks. The RSI is bound between 0 and 100. Traditionally, a reading above 70 indicates overbought, and below 30, oversold.

Bollinger bands help determine whether prices are high or low on a relative basis. They are used in pairs, both upper and lower bands and in conjunction with a moving average.

The Bollinger Bandwidth is the difference between the lower and upper bands divided by the middle band. During periods of high volatility, the distance between the two bands will widen and the Bollinger Band Width will increase. The Bollinger bandwidth above the moving average indicates an increase in volatility.

Bollinger Bands consist of an N-period moving average (MA), an upper band at K times an N-period standard deviation above the moving average (MA + Kσ), and a lower band at K times an N-period standard deviation below the moving average (MA − Kσ).

Relative strength index is a leading momentum oscillator that identifies the rate of change of price. Bollinger Bands are lagging indicators of volatility that identify asset prices that have deviated from the mean. RSI and BBs are combined to get strong reversal signals while trading oversold or overbought markets.