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Using Bollinger bands (6)

Phillip Konchar


Bollinger band deviation pinching

Deviation pinching is when the Bollinger bands narrow or “pinch” together, this means volatility is low.  Traders should be on alert when a pitch starts for a volatility breakout and any movements of price outside the bands. The market is waiting for either the bulls or bears to take control.

Crossing any of the bands

Traders should be alert when the price crosses any of the bands. If a price change moves through the middle band this could indicate a change of trend, we know this because the middle band is the moving average and we’ve discussed how MAs are used to identify the trend in our Moving Averages Explained course.

When a price moves outside the upper or lower band this is called a tag, and it implies strength or weakness in the price.

These are definitely not trading signals, but the significant tags to watch out for in a bullish trend is when the price falls below the lower band and in a bearish trend when it moves above the upper band. These are signs of weakness in the trend.

To identify support and resistance

Many traders use Bollinger bands to help identify dynamic support and resistance levels, these work best over longer periods in established trends.

Limitations of Bollinger bands

  • Bollinger bands take a significant amount of time for the old volatility to filter its way out of the calculation, this means recent price changes take time to filter through.
  • Bollinger bands aren’t binary so interpretation is subjective, two traders looking at the same chart can interpret different outcomes.

Like with all indicators using it by itself does not present a rounded picture of the market. Understanding volatility is important and there aren’t too many other indicators that help us do it as easily as Bollinger bands. If used with other indicators and technical analysis techniques it is a really useful tool.

Key Learning Points
  • Bollinger bands are used to identify volatility breakouts, weakness in the trend and dynamic support and resistance levels.
  • Bollinger bands have their limitations, it takes time for the old volatility to filter out of the calculation and are subjective to interpret.

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