When John Bollinger introduced this Bollinger Bands Strategy over 2 decades ago I was skeptical about its longevity. I thought it would last a while and would fade into the sunset like the majority of popular trading strategies almost daily. I have to admit that i was wrong and Bollinger Bands became just about the most relied on technical indicators which was ever created
For those of you who are not familiar with Bollinger Bands it's rather an easy indicator. You begin with the 20-day Simple Moving Average with the closing prices. The upper along with lower bands are then collection two standard deviations above along with below this moving average. The bands move clear of the moving average when volatility expands and move on the moving average when volatility contracts. Many traders length of the moving average with respect to the time frame they use. For today's demonstration we will depend on the standard settings to hold things simple. Notice in this example the way the bands expand and contract with respect to the volatility and the trading variety of the market. Notice how the bands dynamically narrow and widen in line with the day to day price motion changes.
There's one additional indicator that works together with Bollinger Bands that many traders have no idea of about. It's actually part of Bollinger Bands but since the Bollinger Bands are always drawn within the chart instead of below the chart there is no logical place to put that indicator when rendering the formula for your actual bands. The indicator is known as Band-Width and the sole function of this indicator is to subtract the fewer band value from the upper band. Notice in this example the way the Band-Width indicator gives lower readings if the bands are contracting and increased readings when bands are expanding.
I've used the Bollinger Bands many different ways in the past with positive results. One particular Bollinger Bands Strategy that i use when volatility is decreasing from the markets is the Squeeze access strategy. It's a very simple strategy and works perfectly for stocks, futures, foreign stock markets and commodity contracts.
The Squeeze strategy will be based upon the idea that once volatility decreases for extended amounts of time the opposite reaction typically occurs and volatility expands greatly once more. When volatility expands markets usually begin trending strongly in one direction for a short time of time. The Squeeze begins while using the Band-Width making a 6 thirty days low. It doesn't matter what your number is because it's relative only to the market you're looking to trade and nothing in addition.
In this example you can see IBM stock reaching the lowest level of volatility in 6 months. Notice how the cost of the stock is barely moving at the time the 6 month Band-Width Minimal Is Reached. This is the time to begin looking at promotes because 6 month low Band-Width ranges typically precede strong directional moves.
In this example you can see how IBM stock breaks outside of the upper Bollinger Band immediately following stocks Band-Width level reached 6 thirty days low. This is a very common occurrence and another you should begin watching out for each day. The 6 month Band-Width low is an excellent indicator that precedes strong directional impetus.
In this example you can see how Apple Computers reaches the best Band-Width level in 6 months and another day later the stock breaks outside of the upper band. This is the type regarding set ups you want to monitor each day when using the Band-Width indication for Squeeze set ups.
Notice the way the Band-Width begins to increase rapidly after reaching the 6 thirty days low level. The price of the stock usually begin moving higher within several days of the 6 month Band-Width small.
The Squeeze is one with the simplest and most effective options for gauging market volatility, expansion along with contraction. Always remember that markets undergo different cycles and once volatility decreases to your 6 month low, a reversion usually occurs and volatility begins to move into once again. When volatility begins to increase prices usually begin moving in one direction for a short time of time.