Bollinger Bands Stock Analysis & Bollinger Trading Signals

Created by John Bollinger

Bollinger bands are formed by three lines. The middle line is a Moving Average - 20 period Simple Moving Average.

The bands are then drawn at a distance away from the moving average These are the bands that form the lower & upper lines.

The distance where the bands are drawn is determined by another indicator called the standard deviations. Standard deviation is a measure of volatility in the stocks market or that of stock.

Since the stocks market volatility keeps on changing, the standard deviation will keep varying, and since Bollinger bands are drawn using the standard deviation the distance of the bands will keep on adjusting themselves to the stocks market conditions.

When the stocks markets become more volatile, the bands widen and they contract during less volatile periods.

The 3 Bands are designed to encompass the majority of a stock price action. The middle band forms the basis for the trend, typically a 20-periods simple moving average.

This band also serves as the base for the upper & lower bands. Upper band's and lower band's distance from the middle band is decided by volatility. The upper band is drawn at +2 standard deviationss above the middle band while the lower band is drawn at -2 standard deviations below the middle band.

Stock Analysis and How to Generate Trading Signals

• Bands provide a relative definition of high & low

• Used to identify periods of high & low volatility

• Used to identify periods when stock prices are at extreme zones

the Squeeze

The bands tighten as volatility lessens, this identifies periods of consolidation. Sharp stocks price break-outs tend to occur after the bands tighten.

Consolidation Pattern

the Bulge

If stock prices break through the upper or lower band move outside the bands a continuation of the current stock trend is expected.

Double Tops & Double Bottoms

Bottoms and tops made outside the bands followed by bottoms & tops made inside the bands call for reversals in the trend

The Head Fake - Stock Trading Whipsaw

Traders should be on lookout for false break outs known as whipsaws or head fakes.

Stock Price often breaks out in one direction immediately following the Squeeze causing many traders to think the breakout will continue in that direction, only to quickly reverse & make the true, more significant breakout in the opposite direction.

Traders acting quickly on the initial breakout often get caught on the wrong side of the stocks price action, while those traders expecting a "false breakout" can quickly close out their original position and enter a trade in direction of the reversal. It is always good to combine Bollinger bands with other confirmation Indicators.