Bollinger Bands help technical analysts determine breakout prices for a stock and more accurately define a trading range. They also help to identify volatility.
The bands incorporate standard deviation to chart a top and bottom line on either side of a stock's moving average. There are several indicators created to work with Bollinger Bands to help make further inferences about trend reversals and price breakouts. Some of the most common indicators used by traders are BandWidth, %b, and BBTrend, all of which were created by John Bollinger.
Key Takeaways
- BandWidth is the measure of the width of the bands relative to the middle band. Traders use it to find Bollinger Squeezes.
- Another indicator, %b, plots the stock's closing price as a percentage of the upper and lower bands. This helps traders to identify when a price jumps a band.
- BBTrend can signal both strength and direction. It is an alternative to the average directional index.
Using the BandWidth Indicator
BandWidth, or BW, is the measure of the width of the bands relative to the middle band. One pattern traders look for with BW is called the Bollinger Squeeze. It is identified as a narrow width caused by low volatility.
Traders calculate a Squeeze using this formula: Top Band (20 periods) – Lower Band (20 periods) ÷ Middle Band (20 periods).
The Squeeze can also be easily seen on a chart and, as its name indicates, looks like the upper and lower bands are squeezing the middle band. Traders use this indicator as a signal that volatility is about to increase. They can combine this insight with signals from other indicators, such as the accumulation/distribution indicator, to identify the direction of the impending breakout. If price is currently heading down and indicators are heading up, the sign is bullish.
Using the %b Indicator
Another indicator used with Bollinger Bands is %b, which plots the stock's closing price as a percentage of the upper and lower bands. The upper band is identified as 1.0, the middle band 0.5 and the lower band zero. Thus, %b shows how close the stock's current price is to the bands.
For example, if the upper band sits at $30 and the current price is $22.50, %b equals 0.75, putting the stock three-fourths of the way toward the upper band limit. This is helpful for traders to identify when a price jumps a band, which can determine divergences and trend changes.
Using the BBTrend Indicator
BBTrend is a relatively new indicator developed by John Bollinger to work with Bollinger Bands. It is one of only a few indicators that can signal both strength and direction, making it a very valuable tool for traders. BBTrend is calculated using the following code in the chart:
lower = abs(lowerBB(20) – lowerBB(50))
upper = abs(upperBB(20) – upperBB(50))
BBTrend = (lower - upper) ÷ middleBB(20)
If the BBTrend reads above zero, the signal is a bullish trend, and if the BBTrend reading is below zero, the signal is a bearish trend. The degree above or below zero determines the strength or momentum behind the trend. The BBTrend offers an alternative to the average directional index, or ADX, which gives similar readings.
FAQs
Traders often combine the Bollinger Band indicator with Moving Averages. The choice of which particular MA to use depends on the time frame and the trading style, yet on an intraday hourly chart, the 10-period Simple Moving Average (SMA) may be a good option.
What pairs well with Bollinger Bands? ›
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 can Bollinger Bands be good along with? ›
Traders using Bollinger Bands alongside other technical analysis tools, including trendlines, candlestick charts, and Relative Strength Index (RSI), and fundamental analysis tools, which include analysing a company's financial statement, can improve the accuracy of trading signals.
Which indicators work best together? ›
One typical combination is to use moving average convergence divergence (MACD) and a chart showing support and resistance. A trader could use one momentum and one trend indicator, for example, a stochastic oscillator (a momentum indicator) and an Average Directional Index (ADX) (a trend indicator).
What goes well with Bollinger? ›
Fraisier Cake and Bollinger Rosé
Some pairings are just made for each other, uniting in a marriage of flavours that seem like they were created simply to be tasted together. Strawberry Cake, with its subtle sweetness and slight acidity, is the perfect complement to a glass of Bollinger Rosé.
What is the MACD indicator with Bollinger Bands? ›
The strategy combines the crossover signals of Bollinger Bands and MACD indicator. When the price breaks above the upper Bollinger Band and MACD shows a bullish crossover, it opens a long position; when the price breaks below the lower Bollinger Band and MACD shows a bearish crossover, it opens a short position.
What timeframe is best for Bollinger Bands? ›
If you're a day trader, then you'll use the Bollinger Bands on the lower timeframe like the 15-minutes or 5-minutes timeframe. If you're a swing or position trader, then you'll use the Bollinger Bands on the daily or the weekly timeframe.
What is the best Bollinger Band strategy? ›
Buying on the break of the lower Bollinger Band is a simple strategy that often works. In every scenario, the break of the lower band was in oversold territory. The timing of the trades seems to be the biggest issue. Stocks that break the lower Bollinger Band and enter oversold territory face heavy selling pressure.
What is the best moving average to use with Bollinger Bands? ›
Bollinger Bands typically use a 20-period moving average, where the "period" could be 5 minutes, an hour or a day.
Which indicator gives highest accuracy? ›
Which indicator has the highest accuracy? The Moving Average Convergence Divergence (MACD) indicator is often considered one of the most accurate technical indicators. That is because it uses a combination of moving averages to spot potential buy and sell signals.
10 most popular indicators for trading
- Moving Average Convergence Divergence (MACD) ...
- Stochastic Oscillator. ...
- Bollinger Bands. ...
- Relative Strength Index (RSI) ...
- Fibonacci Retracement. ...
- Standard Deviation. ...
- Ichimoku Cloud. ...
- Client Sentiment. tastyfx client sentiment provides insights into the positioning of traders in a specific market.
Stochastics are a favored technical indicator because they are easy to understand and have a relatively high degree of accuracy. It falls into the class of technical indicators known as oscillators. The indicator provides buy and sell signals for traders to enter or exit positions based on momentum.
What are Bollinger Bands combined with? ›
Since Bollinger Bands are a pure price indicator, you might want to consider combining them with volume indicators for even more depth and insight. Ultimately, there's no indicator that guarantees you'll always get in at the bottom or out at the top.
What is the combination of RSI and Bollinger Bands? ›
When the two are combined, the RSI acts to either support or dispel possible price trends. For example, if a stock price reaches the upper band of a Bollinger Band price channel and, at the same time, the RSI reads 70+, the trader could make the interpretation that the security is overbought.
What is the best time frame to trade Bollinger Bands? ›
If you're a day trader, then you'll use the Bollinger Bands on the lower timeframe like the 15-minutes or 5-minutes timeframe. If you're a swing or position trader, then you'll use the Bollinger Bands on the daily or the weekly timeframe.
Which trading indicator can be combined with Bollinger Bands to help confirm trend direction and strength providing additional confirmation for trading signals? ›
Bollinger Bands and the Moving Average Convergence Divergence (MACD) indicator can help confirm trend direction and strength, providing additional confirmation for trading signals.
