Bollinger bands are used to measure a market's volatility.
Basically, this little tool tells us whether the market is quiet or whether the market is loud! When the market is quiet, the bands contract and when the market is loud, the bands expand.
Take a look at the chart below, you should notice that when price is quiet, the bands are close together and when price moves up, the bands spread apart.
The Bollinger band has its own calculations but you actually don't need to bother yourself with any of that. Knowing how to apply this amazing indicator to your trading is actually more important.
The Bollinger Bounce
One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands. That is the whole idea behind the Bollinger bounce. By looking at the chart below, you can see that price did two things….
First, it touched the extreme part of the band, and then it went back down to the middle of the band…
The move you saw was a classic Bollinger Bounce. The reason these bounces occur is because Bollinger bands act like dynamic support and resistance levels.
The longer the time frame you are in, the stronger these bands tend to be. Some traders have developed systems that thrive on these bounces. A strategy like this is best used when the market is ranging and there is no clear trend.
The market also trends, so there are ways to equally trade a trending marketing using the Bollinger band indicator.
Bollinger Squeeze
The Bollinger squeeze is pretty self-explanatory, however when the bands squeeze together, it usually means that a breakout is getting ready to happen.
If the candles start to break out above the top band, then the move will usually continue to go up. If the candles start to break out below the lower band, then the price will usually continue to go down.
Looking at the chart above, you can see the bands squeezing together. The price has just started to break out of the top band. Because it is breaking out the top band, the possibility is very high that it will continue going up prompting an upward trend.
That was exactly what it did if you now look at the image below.
This is how a typical Bollinger Squeeze works.
This strategy is designed for you to catch a move as early as possible. Setups like these don't occur every day, but you can probably spot them a few times a week if you are looking at a 15-minute chart.
There are many other things you can do with Bollinger bands, but these are the 2 most common strategies associated with them. This is basically the information you need to start with on Bollinger band and with constant practice with this indicator; you would be able to come up with other unique ways to work with it.
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