How do traders use Bollinger Bands?

Price near the lower band is relatively low compared with recent prices; near the upper band, relatively high. A squeeze (very narrow bands) often comes before a big move. In strong trends the price can 'walk the band' and keep touching it.

Volatility and trend strength

Bollinger Bands

Bollinger Bands are a 20-period SMA with an upper and lower band 2 standard deviations away. The bands widen when the price is volatile and narrow when it is calm.

How to read it

Price near the lower band is relatively low compared with recent prices; near the upper band, relatively high.
A squeeze (very narrow bands) often comes before a big move.
In strong trends the price can 'walk the band' and keep touching it.

Settings

Default 20 and 2. Some use 20 and 2.5 for fewer touches.

Example rule to test

Rule to test: buy when the price closes back above the lower band; exit at the middle band.

Common mistake

Treating every upper-band touch as a sell signal during a strong uptrend.

Try it free on iTradeChart

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For learning only. Backtests use past data and do not guarantee future results. Not investment advice.