Srading.com

Menu
  • Home
  • Markets
    • Forex
    • Stock
  • Fundamental Analysis
    • Economics
    • Money & Banking
  • Technical Analysis
    • Drawing Tools
    • Chart Patterns
  • Tools
    • Online Charts
    • Economic Calendar
    • Interest Rate Today (Live Widget)
    • Forex Market Hours
    • Currency Indexes Chart
    • National Holiday Calendar
    • CoT Chart
    • Quotes

RISK WARNING: Trding financial assets come with a high risk of losing money. So, everything you read on this website is for educational purposes or personal opinions only

Read our DISCLAIMER
Home
Technical Analysis
Drawing Tools
Bollinger Bands Indicator: Strategy, Calculation & Examples
Drawing Tools

Bollinger Bands Indicator: Strategy, Calculation & Examples

June 20, 2022 Zafari

Bollinger developed the Bollinger Bands Indicator. It is a technical indicator that measures the volatility of a financial asset.

Bollinger Bands is placed on the price chart, containing three lines. The middle line is a moving average (can be any type of MA), and the two others located above and under the moving average are bands. In the following, I have explained the calculation formula of MA and two upper and lower bands.

The upper and lower lines diverge as the volatility increases and converge as the volatility decreases.
Due to being very famous almost, every trading soft-wares have this indicator.

Bollinger Bands Indicator
Bollinger Bands Indicator Applied on EURUSD in MT4 by MetaQuotes Software

In the above chart you see that when the volatility is low, the upper and lower bands tend to get closer. And when the volatility is high, the distance between them gets wider.

Before I continue writing, I want to let know how to insert a Bollinger Bands indicator for those who do not know. If you understand, skip it.

Read more: Moving Average Envelopes Indicator Fully Explained

How to Insert Bollinger Bands Indicator into Your Chart in MT4

The MetaTrader 4 is the most famous trading platform in the market. That is why I chose this software.

To insert Bollinger Bands go to Insert>Indicators>Trend> and click on Bollinger Bands.

Inserting Bollinger Bands in MT4
Inserting Bollinger Bands in MT4 by MetaQuotes Software

Bollinger Bands Settings in MT4

For the first time that you insert the Bollinger Bands Indicator, the settings window pops up. Moreover, you can open it by right-clicking on any of its lines and clicking on “Bands Properties”.

The window of Bands Properties has three tabs: Parameters, Levels, and Visualization.

Bollinger Bands Indicator Settings
BB settings in MT4 by MetaQuotes Software

In the parameters tab, you can select period (number of candlesticks), shift (toward the right or left), coefficient of deviation(distance between bands and the centerline), application price, and style it. Deviation Coefficient and period selection are crucial to understanding, and I have explained them in the upcoming paragraphs. If you are interested to know about the application price, I have discussed it in detail in the middle of this article.

Levels and Visualization are the same as other tools’ Levels and Visualization.

How to Calculate Bollinger Bands Lines?

The Bollinger Bands has three lines: centerline and two outer lines.

The centerline is a moving average. You can apply any price to this moving average that you want.

A moving average formula is the following:

MA = (sum of n prices)/n

In the above formula, “n” is the number of candlesticks, and MA is the Moving Average.

The upper line (upper band) formula is the following:
UB = MA + DN(StdDev)
LB = MA – DN(StdDev)

In the above formulas:
UB – Upper Band
MA – Moving Average
DN – Deviation number (the number that Standard Deviation is multiplied)
StdDev – Standard Deviation of the number of candlesticks used in the indicator.

How to trade Bollinger Bands Indicator?

Bollinger Bands Indicator has one band above and another under the moving average. To trade professionally, you need to test and apply for various numbers in MA and the Standard Deviation Number. Because price actions depend on numerous factors and you need to study under many circumstances to add to your knowledge.

I suggest you play with Bollinger Bands and go back on your chart and study deeply.

Moving Average in Bollinger Bands

The moving average (MA) in Bollinger Bands defines the overall trend of an asset. Pick the correct number.

I recommend you to go to your chart and play with it.

Select the number of moving average periods as you are comfortable. If you are a long-term investor, you may need to select a higher number, and as a short-term trader, you may need a smaller number.

I think it is not a good idea to recommend a specific MA. Because from asset to asset, you need different MA. So, I highly recommend you to experience it yourself. Recommending a specific number for a moving average is difficult due to many factors that affect your analysis, such as mentality, emotional strength, assets, etc.

Example of MA in BB

In the Bollinger Bands Indicator, a higher moving average period makes the outer bands less smooth. Oppositely, a slower moving average period makes upper and lower bands smoother.

32 period (candlestick) MA in Bollinger Bands Indicator
32 period MA in Bollinger Bands Indicator in MT4 by MetaQuotes Software

In the above chart, the outer bands do not look very smooth. And, the price has crossed bands multiple times.

64 Period Bollinger Bands Indicator
64 Period BB in MT4 by MetaQuotes Software

In the above chart, I doubled the MA in BB Indicator. You see that the distance between bands is wider than in the previous chart. Moreover, the upper and lower bands are smoother than the “32-period” moving average Bollinger Bands.

Deviation in Bollinger Bands Indicator

The distance between the moving average and bands can be broader or narrower. It is the deviation number in Bollinger Bands Settings that defines the distance.

Long-term traders select a higher standard deviation number, while short-term traders select a lower number.

Statisticians agree that in a normal distribution approximately:

  • One Standard Deviation of the mean cover 68% of data set;
  • Two Standard Deviations of the mean cover 95% of data set; and
  • Three Standard Deviations of the mean cover 99.7% of data set.

I like to repeat again and again: experience it yourself while you are reading articles on srading.com.

Based on the chart and financial asset, you have to select a deviation that the price moves between upper and lower bands around 95% of the time. You need to test and analyze the chart of an asset and go back to see if you have chosen the right deviation.

You should not select a very low standard deviation number because it will signal too frequently and make you emotional leading to losses. It should not be too wide because you will miss a lot of signals that could make you money.

When Bollinger Bands Indicator converges, it means that the market is in correction. Narrower the distance between bands represents a more reliable correction.

The best time to go long using Bollinger Bands after a correction is when the price is above the moving average and the trend is confirmed by other tools such as MACD Indicator and chart patterns. On the other hand, if the price breaks the lower band, and the breakout of the pattern is confirmed by other tools, it is time to look for sale signals.

Example of StdDev in BB

As the standard deviation number becomes bigger, the distance between upper and lower bands gets wider and vice versa.

Standard Deviation Number compared in Bollinger Bands Indicator
Source: MT4 by MetaQuotes Software

Study the Bollinger Bands In Real Chart

Click on “f(x)>Overlap Studies>Bollinger Bands” and set it as you wish to insert the indicator.

Bottom Line

Bollinger Bands Indicator is a great tool if you use it properly.

To understand it better and apply the strategies you need to play with it and go back in the past to see various situations.

You can not look at all charts for 24 hours, so if you missed an opportunity, it is not a good time to enter the market. It will be better to wait for correction. And when the correction support or resistance lines broke place a trade.

Moreover, combine your analysis with other techniques such as fundamental analysis, inter-market analysis, wave analysis, chart patterns, candlestick patterns, and an oscillator.

When many techniques confirm a signal, it is more powerful, and you have a higher chance of winning a trade.

Share
Tweet
Linkedin
Pinterest
Reddit
Email
Prev Article
Next Article

Related Articles

Relative Strength Index (RSI): Calculation & How to Trade It?
Relative Strength Index (RSI) is a technical indicator that measures …

Relative Strength Index (RSI): Calculation & How to Trade It?

Linear Regression: Calculation and How to Use It in Trading?
A linear regression channel is consist of three lines using …

Linear Regression: Calculation and How to Use It in Trading?

Equidistant Channel in MT4: Complete Introduction
In an Equidistant Channel, the upper and bottom lines of …

Equidistant Channel in MT4: Complete Introduction

MACD Indicator: Calculation & How to Trade It?
The MACD indicator is a leading indicator that predicts possible …

MACD Indicator: Calculation & How to Trade It?

What is the Stochastics Oscillator & How to Trade It?
The stochastics oscillator is a leading indicator that expresses overbought …

What is the Stochastics Oscillator & How to Trade It?

What is A Fibonacci Expansion & How to Use It?
Fibonacci Expansion is also known as Fibonacci Extension. It tells …

What is A Fibonacci Expansion & How to Use It?

About The Author

Zafari

Zafari is a professional trader and has been in the financial market since 2014. He has a bachelor of public economics and an MBA. For some reason, he does not show his face. And he loves you all!

Leave a Reply Cancel Reply

  • Recent
  • Popular
  • Comments
  • Tags

Srading.com

QUICK LINKS

  • About
  • Cookies Policy
  • Terms & Conditions
  • Disclaimer
  • Privacy Policy
  • Contact Us

LATEST POSTS

  • Elliott Wave Theory Guide for Beginners
  • Top Continuation Candlestick Patterns
  • Top Reversal Candlestick Patterns
  • 6 Popular Continuation Patterns & How to Trade
  • 8 Popular Reversal Patterns and How to Trade Them

FOLLOW US ON SOCIAL MEDIA

  • Facebook
  • Twitter
  • LinkedIn
  • Instagram
  • Pinterest
  • Telegram
  • Reddit
  • YouTube

Trading financial assets are risky. Everything you read on this website is just for educational purposes or personal opinions only. Read our DISCLAIMER!

Copyright © 2023 Srading.com

Ad Blocker Detected

Our website is made possible by displaying online advertisements to our visitors. Please consider supporting us by disabling your ad blocker.

Refresh
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By continuing this website or clicking “Accept”, you consent to the use of ALL the cookies.
Do not sell my personal information.
Cookie SettingsAccept
Cookies Policy
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT