Bollinger Bands Trading – Using Volatility to Optimize Entry and Exit Points

What is Bollinger Bands Trading?

 

 

Bollinger Bands trading is a strategy that uses Bollinger Bands, a volatility-based technical indicator, to identify potential overbought and oversold conditions, as well as breakout opportunities. Bollinger Bands help traders determine when an asset is trading at extreme levels relative to its recent price action, making it a valuable tool for both trend-following and reversal strategies.

 

 

Developed by John Bollinger in the 1980s, Bollinger Bands consist of three lines:

 

 

- Middle Band: A simple moving average (SMA), typically set to 20 periods.

 

 

- Upper Band: The SMA plus two standard deviations, representing overbought levels.

 

 

- Lower Band: The SMA minus two standard deviations, representing oversold levels.

 

 

When price reaches the upper or lower band, it suggests that the asset may be overextended and due for a reversal or a continuation breakout.

 

 

How Bollinger Bands Trading Works

 

 

1. Identify Market Conditions Using Bollinger Bands

 

 

- Low Volatility (Squeeze Phase): When the bands contract, it signals that volatility is low, often preceding a large breakout.

 

 

- High Volatility (Expansion Phase): When the bands widen, it indicates increased volatility, often following a price surge or collapse.

 

 

- Overbought Condition: Price touching the upper band suggests that the asset may be overbought, signaling a potential pullback.

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