The Bollinger Bands are a popular volatility indicator that can help you in many aspects of trading. The bands are most useful for helping you set entry and exit points, as well as determine your stop-loss and profit targets.
In this article, we’ll go over the best trading rules and strategy to follow for making use of the Bollinger Bands.
Bollinger Bands Trading Rules and Strategy
To begin understanding how the Bollinger Bands can increase your success as a trader, it’s worth mentioning how the bands are constructed. The indicator is formed from a moving average line along with two envelopes. The envelopes are based on standard deviations of price that widen and contract based on price movement.
Using the Bollinger Bands is simple. You can buy once price meets the moving average and sell once price meets the upper band. Alternatively, if you are expecting a strong uptrend, you can buy once price meets the upper band and sell at a later point, you should do this if you see other positive signals from indicators such as the RSI or the MACD.
Below are some more tips you can use with the Bollinger Bands.
- Price meeting the upper and lower band is not a reliable signal. More information is needed from the security’s momentum and other uncorrelated factors before entering into a position.
- The indicator is most useful when it’s paired with other indicators.
- You’ll notice that price has a habit of reverting back to the moving average or mean price, this is called mean reversion.
For a full breakdown on how to use the bands, you can check out our full guide here.