Bollinger Bands ® Crossover : Price Analyses

Bollinger Bands ® Crossover

A Bollinger Bands crossover is one of the most common signals generated by the indicator. As a measure of standard deviation, the bands widen and contract depending on price action. The bands widen when a major move takes place and contracts when price is less volatile.

Crossovers, on the other hand, refer to when price breaks out of either the lower or upper limits of an envelope and therefore come in both bullish and bearish varieties. A breakout is sometimes referred to as riding the bands when it occurs several times in succession.

bollinger bands crossover

The importance of Bollinger Bands Crossover

When price breaks out of the upper limits, this is a sign of considerable strength for the price trend and implies that price will continue along its current trajectory. In other words, prices moving above its standard deviation is not reason to assume there will be a pullback towards its moving average or lower band.

In the above example, notice how NEO/USD violated its upper limits multiple times that was supported by heavy volume.

When the situation is reversed and price breaks below the lower Bollinger Band, this is a sign of weakeness. You should, therefore, expect that the sell-off will continue instead of expecting a bounce towards the moving average.

Crossovers are one of the most basic signals generated by Bollinger Bands, but successive crossovers are rare to see in the marketplace. It’s estimated that 80% of all the price movements will take place inside the bands, thus making crossovers a rare, albeit important signal to be aware of.

A more common strategy to trade with Bollinger Bands is when price trades above and below its moving average and then reverts back to its mean. You can find this trading strategy and others here in a comprehensive post on the subject for free for a limited time.

 

 

Matthew North

I have a passion for trading, behavioral finance, technology, travel, and writing. Contact: matthew@priceanalyses.com.

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