25. How to Trade Bollinger Bands – Stocks, Futures, Forex

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Practice these concepts with a free practice charting and trading account here: http://bit.ly/IT-forex-demo3

For the full lesson with images, text, links, and discussion, go here: http://www.informedtrades.com/4206-bollinger-bands.html

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A Lesson on Bollinger Bands for active traders and investors using technical analysis in the forex, futures, and stock markets.

The link that I refer to on Standard Deviation is here: http://en.wikipedia.org/wiki/Standard_deviation

The link that I refer to with more resources on Bollinger Bands is here:

http://www.informedtrades.com/tags/index.php/bollinger%20bands/

In our last lesson we learned about the Stochastic Oscillator and how traders use this in their trading. In today’s lesson we are going to learn about an indicator which helps traders gauge the volatility and how current prices compare to past prices.

Bollinger Bands are comprised of three bands which are referred to as the upper band, the lower band, and the center band. The middle band is a simple moving average which is normally set at 20 periods, and the upper band and lower band represent chart points that are two standard deviations away from that moving average.

Example of Bollinger Bands:

Bollinger bands are designed to give traders a feel for what the volatility is in the market and how high or low prices are relative to the recent past. The basic premise of Bollinger bands is that price should normally fall within two standard deviations (represented by the upper and lower band) of the mean which is the center line moving average. If you are unfamiliar with what a standard deviation is you can read about it here http://en.wikipedia.org/wiki/Standard_deviation. As this is the case trend reversals often occur near the upper and lower bands. As the center line is a moving average which represents the trend in the market, it will also frequently act as support or resistance.

The first way that traders use the indicator is to identify potential overbought and oversold places in the market. Although some traders will take a close outside the upper or lower bands as buy and sell signals, John Bollinger who developed the indicator recommends that this method should only be traded with the confirmation of other indicators. Outside of the fact that most traders would recommend confirming signals with more than one method, with Bollinger bands prices which stay outside or remain close to the upper or lower band can indicate a strong trend, a situation that you do not want to be trading reversals in. For this reason selling at the upper band and buying at the lower is a technique that is best served in range bound markets.

Example of Buying and Selling at the Upper and Lower Band:

Large breakouts often occur after periods of low volatility when the bands contract. As this is the case traders will often position for a trend trade on a break of the upper or lower Bollinger band after a period of contraction or low volatility. Be careful when using this strategy as the first move is often a fake out.

Example

As Bollinger bands paint a good picture directly on the price chart of how high or low price is relative to historical prices, this is a good indicator to use in conjunction with other methods such as some of the chart patterns that we have learned so far and some of the candlestick patterns which we will learn in future lessons. Below is one such example:

As Bollinger Bands are one of the most popular indicators around I have created a special page on InformedTrades.com which lists multiple resources for those looking for more information on trading Bollinger Bands.

That’s our lesson for today. You should now have a good understanding of Bollinger bands and how traders use these in their trading. In our next lesson we are going to go over the Average Directional Index or ADX, which helps traders identify the strength or weakness of a trend so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to have them in the comments section below, and have a great day!

Comments

Anna Forex Group says:

Thanks for video. It’s very informative, but it’s better to automize the
process of trading than learn all forex rules. So come at my channel and
watch how to get our absolutely free and profitable advisor per one minute.

FreeFX indicator says:

I have a lot of free fx tool, can share with people.

InformedTrades says:

The difference between trading and going to a casino is that when you go to
a casino the odds are always against you and in the house’s favor. Best
Regards, Dave

venkstaar says:

Hey Dave, that was an informative session on Bollinger Bands. I am an
active intra-day currency trader and i wish to know which charts are
typically suitable for Bollinger Bands in active sessions.I like to look at
Daily charts for the broad pattern and break them down to 120 Mins or
hourly charts for a trade idea. Appreciate your comments. – Venky

Pip Hacker says:

Thank you for great videos … i learned alot from you sir … God Bless you

LondonBoy2006 says:

@km703 Exactly nothing is for free, David gets money from FXCM as an
Introducing broker.

jeffguroo says:

I am new to trading to forex and have been using the bollinger bands since
the first night. I wish I had watched this video earlier on, especially the
tip on the 2nd breakout after a contraction.

InformedTrades says:

thanks again for the feedback I will add that one to the list. In the
meantime check the description and click the third link on the page that
comes up. This will take you to a tutorial by John Bollinger that covers
what you are talking about and is a good read in general.

InformedTrades says:

The difference between trading and going to a casino is that the odds are
always against you when going to a casino so over the long term there is no
way to win.

xybersurfer says:

good video! i’m going to try it. i’ve noticed that my strategy loses too
much when there is no trend. (so much spam here)

purplerenizz says:

Hi David, can you tell us something more about Momentum indicator? Thanks
again.

yulb50 says:

hey david vivo en medellin y estoy metido en toda esta ciencia del forex y
stocks me gustaria intercambiar ideas contigo

danutzorion says:

i’m newbie in forex but after i saw all this videos i;ve start to win ,i
make at least 100 hundred pips per day,maybe for you is not very much but
for me it is,my loses are insignificant ,thank you for this lessons,i
learned allot.

LondonBoy2006 says:

if you make at least 100 pips a day, then you should be a multi millionaire
in 6 months.

sailorguyli says:

David , My compliments on the clarity and precision of your videos. I’m
getting through nearly all of them,,and although Ive traded before, I
regard this as the best series of educational explanations Ive ever seen
Thank you for the good work. Eric

hypno63 says:

excellent

pandey835 says:

Good Description

mr667 says:

lol, true. but instead of a black flag with arabic writings on it, there
needs to be a black flag with a price chart on it behind him.

My Videos says:

I agree with the mix idea. I started out years ago as a fundamental trader
and made good trades but missed a lot because that didn’t match a criteria.
Few years later I learned TA and did well with it but found I got whipsawed
about more than I’d like to admit. I now implement both and find that my
bottom line is much better than just doing one or the other. But this is
just one traders story. Great Videos btw, would have saved me some
headaches back in the day

GMT Futures says:

I quite like this video very similar to the techniques we teach traders.
Well done great work.

InformedTrades says:

much appreciated, more to come. Dave

EasttSideCustomZ z says:

@neapopica if your new to trading cmc markets is a good start but i wouldnt
recommend going live on cmc because it doesnt give you much things to
change around on the charts. but i recommend you start off with cmc
practice account which you can keep and use forever which most platforms
dont do. then move on to igmarkets which i recommend because it is an
excellent platform to work with you will see why if you try it.but thsi is
my opinion feel free to do what you want… good day

Joe T says:

Yeah really good video Dave! I must admit I still use Bollingers as a guide
with the pipdaq setups which works very well…

InformedTrades says:

Hi Eric, Thanks for the comment and for watching I am glad you like them.
Best Regards, Dave

danutzorion says:

I don’t trade on live account yet,i started 3 months ago on a demo account
with 500 dollars,now I have 1600…I trade only gbpusd,gbpjpy on 5 min
chart,I don’t hold a trade more than one day and i don’t trade monday and
friday.Soon i will have a live account,I hope that it will be the same
thing there….

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