As you can see, this stock gave buyers six opportunities in ten years. So if you are investing, buy when it is in the value buying zone for the long-term. Both upper and lower bands are basically defining 2-standard deviations +/- backed by a 20-day simple moving average . For different securities, different variable settings can be chosen. Typically traders use 20-day simple moving average with a standard deviation of 2.

how to read bollinger band

Let us learn about Bollinger bands and see how you can use the indicator to strategize. Technical analysis tools are designed based on the theory that stock markets and their charts tend to show similar patterns before a trend or a momentum change. Of course, stock markets are much more complex than that, but often, it is our best bet.

Then, there are conditions wherein the stock price rises above or below the upper Bollinger Band and the lower Bollinger Band, respectively. In such a situation too, the investor doesn’t get a clear idea of what to make of it, and whether they must trade or not. The stock market has recently caught the fancy of many investors, with liquidity being high in the …

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As you can see in the above picture, Bollinger bands come with three lines and are calculated as explained above. Similarly, it triggers a trader’s mind to make a buying decision, as they assume it a great opportunity. The prices can flip back and forth, so one should also bear this thing in mind. The uptrend is likely to reach the upper band frequently if it’s stronger, and it also points towards the rising figure of the stock. Overall, Bollinger bands can help a trader to conclude the rising probabilities of an asset.

For the lower band, subtract the standard deviation from the moving average. 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.

how to read bollinger band

Moreover, you can go ahead with buying securities when the price point is nearer the upper Bollinger band. However, you should look out for confirmation of trends using other indicators. The upper and lower bands are typically two standard deviations from the SMA. Investments in securities market are subject to market risk, read all the related documents carefully before investing. Since it is calculated based on a simple moving average, more weight is placed on old data than recent ones. It dilutes the significance of new data and might impact decision making.


The below picture is helpful in understanding how the same will look in a graph. Bollinger Bands is widely used to gauge the strength of an ongoing trend and to identify when the price will start to reverse. If a particular uptrend is strong enough, you could see that the price will continuously reach or breach the upper band. The price could go slightly down upon touching the upper band, but it will continue to peck the upper band till the trend continues.

  • Traders must adjust it to suit their needs and also must take current information into account while making trading decisions.
  • My clients frequently question me-“Hey do you use any indicator”?
  • A big space between the upper and lower bands indicates high price volatility; a small space indicates low.
  • For example, if a price bounces off the lower band and then crosses above the moving average, the upper band then becomes the profit target.
  • By plotting the upper Bollinger Band and the lower Bollinger Band, one can exactly tell which band among the two is the current price of the stock closer to.

For a trader, there’s nothing more satisfying than a timely and useful trading tip. In swing trading, the bands give the trader the leverage to follow the trend efficiently. In the previous example, for long-term we were buying at value points and selling at high points. For this, Bollinger bands are not enough, and you will need to apply other indicators, so be careful.

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You will need first to recognize high prospect support and resistance levels on your chart. The Bollinger band is likely to contract when the market demonstrates no movement. Meanwhile, when there is a lot of activity in the market, they begin to expand. You can observe stock patterns and the Bollinger band indicator to mark good trading opportunities in the market. This is possible by increasing the standard deviation of the Bollinger bands.

Most traders use it as a volatility channel and a momentum tool. The indicator helps to understand whether the current price of a stock can be considered high or low based on relativity. Hence, the three lines – both upper and lower bands and the period line , are used together to form the indicator.

Simple moving average (SMA)

Arshad is an Options and Technical Strategy trader and is currently working with Market Pulse as a Product strategist. Whenever PCR OI is in the range of 0.90 to 1.05, it indicates a rangebound market. Usually, you get to see a one-sided trending move once the range is broken on either side.

The upper and lower bands are standard deviations of that particular stock, and middle one represents the simple moving average. All these three structures amalgamate to produce a price envelope. Bollinger Bands are a tool used by traders and investors to understand market volatility.

In this graph, the middle line represents a simple moving average. And, the other two lines represent upper and lower limits, respectively, creating a price envelope. These bands are dynamic, which allow them to be used for different asset classes to understand price fluctuations and determine overall trends. To understand the two lines in the Bollinger bands, you have to understand standard deviation too. In the case of Bollinger bands, it is a variable that measures the upper and lower price levels within which the stock price moves normally. Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price.

How Bollinger Bands helps a Trader?

Without thinking twice, traders should completely avoid investing in long traders if the downtrend phase is steady at the lower bands. For instance, a trader observes the possibilities of sharp prices move if the bands appear to tighten in the meantime of a low volatility period. John Bollinger, the founder of Bollinger bands long back ago in 1980, developed an amazing tool for technical analysis of the market.

Sell signals all but useless in unchartable 2021 stock marketVirtually all signals that told investors to do anything but buy have done them a disservice this year. Bollinger Bands are somewhat like moving average envelopes, but drawing calculations for both is different. W bottom or double bottom is a technical analysis indicates when a stock price hits two low prices simultaneously, making a W pattern in a graph; hence, the name. This tip is a value for money for all i.e whether one can see the trading terminal or not or is dealing through a broker on phone at BSE, NSE or in F&O.

Technicians use moving averages with support and resistance lines to anticipate the price action of a stock. Upper resistance and lower support lines are first drawn and then extrapolated to form channels within which the trader expects prices to How to Interpret a Correlation Coefficient r be contained. As long as prices do not move out of this channel, the trader can be reasonably confident that prices are moving as expected. This technical tool mainly deals with three components, namely the upper band, lower band and middle band.

However, during the downtrends phase, traders avoid trading, but they find it the best buying opportunity. Hence, in this situation, traders observe a sense of incurring losses; thus, to avoid it, they instantly start selling assets before the reverse trend occurs. Throughout the spawn of strong uptrends, the technical traders strive to capture maximum profits. For instance, if prices pull back but stay within the middle band and again move forward to the upper band, it discloses lots of strength in the stock. However, there’re high chances of fluctuations in prices within the Bollinger bands. For instance, it can touch one band while moving towards another band.

This makes Bollinger bands a favourite among beginners as well. Here, the same is formed when a high is marked above the upper band. Bollinger Bands are also used to measure the strength of a downtrend and the change for a price reversal. When the bearish trend is strong, the price will continue to hang around between the middle and the lower band, touching the support line.

In the 1980s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it. Unlike a percentage calculation from a normal moving average, Bollinger Bands simply add and subtract a standard deviation calculation. Now, talking about a smaller time frame, it is tough to judge the market in a shorter time frame on the basis of Bollinger Bands.