Bollinger bands are used for the purpose of measuring market volatility. Basically, this little tool tells us if the market is calm or very moved. When the market is with little movement, the bands contract, when the market is very unstable, the bands expand.
Notice in the graph below that when the price stayed still, the bands were closer to each other, while when the price rose, the bands separated.
That’s how easy bollinger bands are. It is not necessary that you know their history, how they are calculated or all the mathematical formulas behind them, the most important thing is that you learn how to apply them in your operations.
Bounces on Bollinger Bands
One thing you should know about bollinger bands is that the price tends to go back to the midpoint between the bands, that’s basically the idea of this bollinger bounce. If this were to happen, could you predict, by looking at the following chart, where the price will go?
If you said down, you are correct! As you can see, the price stabilizes falling towards the middle of the bands.
What you just saw is a classic bollinger band bounce. The reason the price turns is because the bands act as mini levels of support and resistance. The longer the period of time you are with the bands, the stronger they will be. Many traders have developed trading strategies based on these bounces, and this system is best used when there is no clear trend in the market.
Now let’s see how to use bollinger bands when the market is trending.
When the Bollinger Bands are very close.
When the bollinger bands are very close to each other, it usually means that a major change is going to happen. If the candle starts to rise above the upper band, the price continues to move higher as a general rule. If the candle starts to fall below the lower band, the price generally continues to decline.
In the graph above you can see how the bands are very close to each other. The price breaks above the upper band. And then it goes up.
This is how bollinger bands generally work when pressed against each other. This strategy is designed to observe a major move as soon as possible.
Now you know what Bollinger Bands are and how to use them. There are many other strategies that you can try with bollinger bands.
As always, it is advisable to combine the Bollinger bands with some other indicator to have greater certainty when making trading decisions.