However, Bollinger Bands have a moving average and outer bands that can act as a leading indicator, as they help to identify areas where the price may stall or reverse. That said, the bands can help to identify areas of dynamic support and resistance​​ as the price moves.
Bollinger Bands® are composed of three lines. One of the more common calculations uses a 20-day simple moving average (SMA) for the middle band. The lower band is calculated by taking the middle band minus two times the daily standard deviation.
#1: Hey Rayner, what timeframe does the Bollinger Bands work best on?
- 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.
Bollinger Band Variations
- When %B is above 1, it suggests that the price is above the upper band;
- When %B equals 1, it means that price is at the upper band;
- When %B is above 0.50, it suggests that the price is above the middle band;
- When %B is below 0.50, it means that the price is below the middle band;
Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price. 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.
Bollinger Bands® are a technical analysis tool developed by John Bollinger for generating oversold or overbought signals. There are three lines that compose Bollinger Bands: A simple moving average (middle band) and an upper and lower band.
Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. A nine-day EMA of the MACD called the "signal line," is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.
Bollinger Bands widen as price volatility increases and tighten as volatility declines. Wider bands imply a higher standard deviation, meaning that an average price is less likely to be concentrated near the mean. Bollinger Bands are used to create context and structure around price.
Best Intraday Indicators
- Moving Averages. Moving averages is a frequently used intraday trading indicators.
- Bollinger Bands. Bollinger bands indicate the volatility in the market.
- Relative Strength Index (RSI) Relative Strength Index (RSI) is a momentum indicator.
- Commodity Channel Index.
- Stochastic Oscillator.
Average True Range (ATR) is the average of true ranges over the specified period. ATR measures volatility, taking into account any gaps in the price movement. Typically, the ATR calculation is based on 14 periods, which can be intraday, daily, weekly, or monthly.
A trading algorithm for a short entry
- Place a short order when the price touches an upper Bollinger band and the Stochastic Oscillator is in the overbought zone.
- Place Stop Loss 10 pips above the level where you placed an order.
- Close your position when the price touches a lower Bollinger band.
A Squeeze candidate is identified when the bandwidth is at a six-month low value. Breaking above the 50-day moving average (the orange line in the lower volume window) on drops in stock price, suggesting a build-up in selling pressure, volume shows above normal values on downside price moves.
When using Bollinger Bands®, designate the upper and lower bands as price targets. If the price deflects off the lower band and crosses above the 20-day average (the middle line), the upper band comes to represent the upper price target.
The MACD indicator supports the bullish trade as the MACD line has crossed the signal line and continues to move above the signal line, showing strong upward momentum. The Bollinger Band® then confirms the move to the upside as price begins to “walk the band†on increased volatility (expansion of the band).
Schaff Trend Cycle is a charting indicator used to help spot buy and sell points in the forex market. Compared to the popular MACD indicator, STC will react faster to changing market conditions. A drawback to STC is that it can stay in overbought or oversold territory for long stretches of time.
The BB MACD indicator is a combination of two technical analysis indicators, which have proven their value: the Bollinger bands (BB) and Moving Average Convergence Divergence (MACD). In the BB MACD indicator the Bollinger bands indicate the strength of the trend and the MACD indicates the direction of the trend.
Limitations of Bollinger BandsOne of these limitations is that Bollinger Bands are primarily reactive, not predictive. The bands will react to changes in price movements, either uptrends or downtrends, but will not predict prices. In other words, like most technical indicators, Bollinger Bands are a lagging indicator.
The opposite of “Playing the Bands†and betting on reversion to the mean is called Playing Bollinger Band breakouts. Breakouts occur after a period of consolidation, when price closes outside of the Bollinger Bands.
The Bollinger Bands (BB) were created in the early 1980s by financial analyst and trader John Bollinger. Basically, the Bollinger Bands work as an oscillator measurer. It indicates whether the market has high or low volatility, as well as overbought or oversold conditions.
