Home / Indicators / Bollinger Bands ® Explained – The Best Trading Indicator

Bollinger Bands ® Explained – The Best Trading Indicator

Bollinger Bands ® are among the most reliable and potent trading indicators traders can choose from. They can be used to read market and trend strength, to time entries during range markets and to find potential market tops. The indicator is also not a lagging indicator because it always adjusts to price action in real time.

In this article, we show you how to use Bollinger Bands ® to improve your chart reading skills and to identify high probability trade entries.

In our pro Forex trading course, you will learn how to use the Bollinger Bands ® to find and time entries step by step.

 

Bollinger Bands ® explained 101

As the name implies, Bollinger Bands ® are price channels (bands) that are plotted above and below price.

The outer Bollinger Bands ® are based on price volatility, which means that they expand when price fluctuates and trends strongly, and the Bands contract during sideways consolidations and low momentum trends.

By default, the Bollinger Bands ® are set to 2.0 Standard deviations. However, we suggest setting them to 2.5 Standard Deviations to make them wider and capture more price action. With the 2.5 standard deviations, 99% of all price action falls between the two bands, which means that a violation of the outer bands becomes a much more meaningful signal as we will see.

The center of the Bollinger Bands ® is the 20-period moving average and the perfect addition to the volatility based outer bands.

Bollinger Bands explained

 

Trend-trading with the Bollinger Bands ®

Bollinger Bands ® do not lag because they always change automatically with price.

 

In my own trading, I use this indicator for one of my setups. If you want to learn how to find the best trades every week, take a look at our premium trading course.

 

We can use the Bollinger Bands ® to analyze the strength of trends and get a lot of important information this way. There are just a few things you need to pay attention to when it comes to using Bollinger Bands ® to analyze trend strength:

  • During strong trends, price stays close to the outer band
  • If price pulls away from the outer band as the trend continues, it shows fading momentum
  • Repeated pushes into the outer bands that don’t actually reach the band show a lack of power

The screenshot below shows how much information a trader can pull from using Bollinger Bands ® alone. Let me walk you through the points 1 to 5:

1) Price is in a strong downtrend and price stays close to the outer bands all the time. This is a very bearish signal.

2) Price fails to reach the outer band and then shots up very strongly.

3) 3 swing highs with lower highs. The first swing high reached the outer band whereas the following two failed .

4) A strong downtrend where price stayed close to the outer band. It tried to pull away, but bears were always in control.

5) Price consolidates sideways, not reaching the outer band anymore and the rejection-pinbar ended the downtrend.

As you can see, the Bollinger Bands ® alone can provide a lot of information about trend strength and the balance between bulls and bears.

BollingerBands_trend

 

Finding tops and bottoms with Bollinger Bands ®

We highly recommend combining the Bollinger Bands ® with the RSI indicator – it’s the perfect match. There are two types of tops that you need to know about:

1) After a trend move, price fails to reach the outer Band as the uptrend becomes weaker. This signal is usually accompanied by an RSI divergence

2) During a consolidation, price spikes into the outer Bands which get rejected immediately

The screenshot below shows both scenarios. The first is the top after a divergence. You can see how the trend became weaker and then eventually failed to reach the outer Band before reversing. I marked the second spike with an arrow which was a trend continuation signal as price failed to break higher during the downtrend. The strong spike that was followed by a fast rejection showed that bulls lacked power.

 BollingerBands_spike

 

You can see that the Bollinger Bands ® are a multi-faceted trading indicator that can provide you with lots information about trend, buy/seller balances and about potential trend shifts. Together with the moving average and the RSI, Bollinger Bands ® make for a great foundation for a trading strategy.

If you want to learn how to trade profitably with a step by step trading approach and a powerful trading system, take a look at our premium trading courses.

 

 

See the Bollinger Bands ® in action

 

 

 

Reference: www.BollingerBands.com

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28 comments

  1. Dear All ..

    Please Post Information about Pivot Points and How to use It .

  2. hello

    do you use this bb (20,close,2.5) only in H4 and D? or is valid for m30 and h1 too, for example? thank you very much

  3. hello guys,

    i tried using the BB on option trading and it wasnt too awesome.
    what other indicators can be added to get an assurance of 80% ITM

  4. Hiya,

    First off, I really like what you are doing and I’ve learned a thing or two here. Do you mind me asking how you have started learning all this stuff?

    Anyway, what I wanted to ask. Could it be that there is a small mistake when you say:
    “After a trend move, price fails to reach the outer Band as the trend becomes weaker. This signal is usually accompanied by an RSI divergence >> Continuation signal”
    Shouldn’t it be convergence and continuation or did I get things wrong?

    • Hello,

      after price fails to reach the out BB during a rally, usually you also see lower highs or at least highs that don’t break the previous high by much. This shows weakness and can point towards a potential reversal.

      Rolf

  5. I really enjoyed your article on Bollinger Bands.
    Actually for myself ,after countless back testing of many strategies and indicators, I find Bollinger Band is still the best tool to use. Especially for strength of trends and reversals .
    You explained it well

    And it isn’t a lagging indicator which is great !

  6. I have another question.

    Does Bollinger Bands re-paint ?

    Meaning previous Bollinger band lines adjust based on current price.

    Thanks

    • Hello Andrew,

      Bollinger Bands don’t repaint but if you see a large candle and a strong move, it may impact the way the previous bands look.

      Rolf

  7. very helpful article…I like the 2.5 deviation suggested

    • I also very much like how you assess trend strength and loss of trend momentum while using Bollinger Bands. Great article and video. Thanks much!

  8. Are you guys using for example a 100 or 200 moving average with this system?

  9. Bollinger and RSI to get muximum benefits you appy it during the 4h00 trading period where London and USA overlaps to each other. What a great article

  10. Hi, really loving your site and youtube videos. Maybe I am just overtired from cramming trading knowledge, but would love if you can clairfy. Where exactly would you look to open long and short postitions and exit using bollinger bands and where would your place stop losses in trending and sideways markets. I trade mainly forex . Thanks!

    • Hello Jaques,

      I am glad to hear that you liked the article and videos.

      In a few days, we will roll out a new update for Tradeciety where we lay out our whole process and strategy step by step. So make sure to check back in to get answers to exactly those questions 🙂

      Rolf

  11. Great article, thank you Rolf!

    p.s.: under “Finding tops and bottoms with Bollinger Bands” should 1) and 2) be switched on the picture?

  12. Do you have any tutorial or guide on how to use Ichimoku cloud ?

  13. This is such a GREAT article! I actually read it for the first time over a year ago, but my level of understanding is sooo much better now. Hands down, it is the best of that I have come across on this subject. Thank you! 🙏

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