Bollinger Bands Indicator Explained - Here's What You Need To Know!

Bollinger Bands Indicator Explained - Here's What You Need To Know!

Bollinger Bands are a very popular indicator, but most traders are using them wrong. Here I will show you the Bollinger Bands secret.

Bollinger Bands are a super simple concept because it's simply a moving average and 2 standard deviations.

If you bring up the Bollinger Bands on your charting software, no matter which software you are using, you will see a centerline which is the moving average, and a line for a standard deviation both, above and below the moving average.

My preferred settings for The Bollinger Bands:
1) Length - The standard length is either 20 or 21 days, and whichever your charting software suggests is fine.
2) Standard Deviation (StdDev) - The default in TradingView, the software I'm using, is 2 & I keep it here.

Now, this is where most people start using it wrong. Most traders use it as a "trend fading system," and here's what I mean.

In the video, you can see I applied the Bollinger Bands to a chart for IBM. You may notice that most of the time, the closing prices are within the Bollinger Bands. Based on my settings this will be 98% of the time.

Most people will wait for the price to close outside of the Bollinger bands, either below the bands to buy, or above to sell. In a sideways market, this is a viable strategy, but this is not the most powerful way to use them.

Looking at a chart for The NDX in the video, and the chart shows it is a trending market. When a market is trending upwards, The upper band is turning up, and prices will often touch the upper band.

When the market is trending down, the prices touch the lower band in the same way. So when you see the lower band is turning down and the prices are touching it, this means the market is in a downtrend.

These upper & lower trends continue until the bands either flatten or turn around.

If we look at a chart for VSTO, the Bollinger Bands at first are going sideways, but then the upper band starts turning up and prices start touching it. How long will it stay in an uptrend? As soon as the upper band starts flattening, or turning around, this is when the uptrend is over.

So why do I not use the Bollinger Bands? I found that the 3 indicators that I already use are perfect for this. I use the RSI, Stochastics, and MACD indicators.

Back on the chart, you can see that as the market is going up we see green bars, and we get green bars when the RSI and the Stochastics are above 50, and the MACD is above the moving average. Black bars mean the market is more likely to trend sideways, and when the Bollinger Bands start to turn around.

We start to see a downward trend when we see red bars and the Bollinger Band starts to turn downward.

So if you need help identifying a trend, Bollinger Bands can help a lot, and here's a quick recap of how it works.

In an uptrend, the upper band will point up and the prices will constantly touch it. The uptrend continues as long as the band stays pointing up. Once it starts to turn sideways the trend is likely over.

In a downtrend, the lower band will point down and the prices will constantly touch it. The downward trend continues as long as the band stays pointing down. Once it starts to turn sideways the trend is likely over.
Referenced videos:
How To Find Strong Support & Resistance
https://youtu.be/gfKnDSjAzvA
Best Trend Indicator For Stocks
https://youtu.be/r6R6RwT9Yms

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Видео Bollinger Bands Indicator Explained - Here's What You Need To Know! канала Markus Heitkoetter