How to Calculate Bollinger Bands Using Excel Video

This indicates that the downward pressure in the stock has subsided and there is a shift from sellers to buyers. Also, pay close attention to the volume; you need to see it drop off dramatically. For this reason, it can be used to find an edge in the market. In essence, the Bollinger Band indicator was created to contain price the vast majority of the time.

The upper band is 2 standard deviations above the 20-period simple moving average. It takes a pretty strong price move to exceed this upper band. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend.

• When that happens, a cross below the 20-day moving average warns of a trend reversal to the downside.
• In fact, John Bollinger used statistics to figure out the relationship between lows and highs, called the Bollinger bands.
• You will want to apply trendlines or another indicator to follow price higher.
• Lagging indicators are best used in combination with leading indicators.
• Because of lower volatility, XLU will have consistently lower BandWidth values than XLK.

However, being an important metric, it can provide signals of optimal entry and exit points when it is used in conjunction with trend direction and trading volume. The BandWidth indicator can be used to identify the Bollinger Band Squeeze. This alerts chartists to prepare for a move, but direction depends on the subsequent band break. A squeeze followed by a break above the upper band is bullish, while a squeeze followed by a break below the lower band is bearish. Sometimes the first break fails to hold as prices reverse the other way.

That being said, using bollinger bands bandwidth to identify trading signals due to Overbought/Oversold conditions while staying within the overall trend is a little bit more straightforward. John Bollinger used the M patterns with Bollinger Bands to identify M-Tops. In its basic form, an M-Top is similar to a Double Top chart pattern. An M-Top occurs when there is a reaction that moves close to or above the upper band.

Using Bollinger Bands

What makes Bollinger Bands %B useful, is that it takes a very popular, well-known indicator (Bollinger Bands ) and narrows the focus. Instead of relying on the appearance of prices in relation to the Bands, technical analysts can use exact values to help make more informed decisions. During a well-defined trend, breaks above 1 and below 0 become much more significant. Therefore %B should be used in conjunction with additional indicators or technical analysis methods to help confirm over trend direction. Identifying when a Breakthrough signifies an actual trend reversal can be a difficult event pinpoint. This is mostly done through historical technical analysis and research.

Conversely, when the upper and lower Bollinger bands tighten, an impulsive move is likely right around the corner. First, subtract the values of the lower band from the upper band. The difference is then divided by the value of the middle band which is the 20-period SMA.

Bollinger Bands & Keltner Channels

The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because the standard deviation formula also uses a simple moving average. The look-back period for the standard deviation is the same as for the simple moving average. Security price returns have no known statistical distribution, normal or otherwise; they are known to have fat tails, compared to a normal distribution. The sample size typically used, 20, is too small for conclusions derived from statistical techniques like the central limit theorem to be reliable. Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices.

Resistance refers to a level that the price action of an asset has difficulty rising above over a specific period of time. The next data point drops the earliest price, adds the price on day 21 and takes the average, and so on. Next, the standard deviation of the security price will be obtained. Standard deviation is a mathematical measurement of average variance and features prominently in statistics, economics, accounting, and finance. Prices have a tendency to bounce within the bands’ envelope, touching one band then moving to the other band. You can use these swings to help identify potential profit targets.

The overbought and oversold strategy

Hurst’s work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding. In the early ’70s percentage bands became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified percent. Percentage bands had the decided advantage of being easy to deploy by hand. At any given time a 7% band consists of a base moving average, an upper curve at 107% of the base and a lower curve at 93% of the base. (Arthur Merrill suggested multiply and dividing by one plus the desired percentage.) When I started using trading bands percentage bands were the most popular bands by far.

First, you need to find a stock that is stuck in a trading range. Most of the money to be made in the market, with minimal risk, is in the margins. As you can see in the above example, notice how the stock had a sharp run-up, only to pull back to the mid-line. You would want to enter the position after the failed attempt to break to the downside. In this setup, you are not obsessed with getting in a position for it to swing wildly in your favor.

How to Calculate the Bollinger Bandwidth

While we only cover double bottoms, you can apply the Bollinger bandwidth indicator to validate other chart patterns. You will see a long bullish candle and a long bearish immediately afterward. It is typically best to look for trading signals generated by the %B during strong or clearly defined uptrends or downtrends.

To better see the trend, traders use the moving average to filter the price action. This way, they can gather important information about how the market is moving. For example, after a sharp rise or fall in the trend, the market may consolidate, trading in a narrow fashion and crisscrossing above and below the moving average. To better monitor this behavior, traders use the price channels, which encompass the trading activity around the trend.

The stock obliged with a surge above the upper band and continued higher throughout September. The advance stalled in late September and BandWidth narrowed again in October. Notice how BandWidth declined below the lows set in August and then flattened out. The subsequent break below the lower Bollinger Band triggered a bearish signal in late October. So, you have multiple signals confirming the index is oversold.

To see what I indicate, simply place the Bollinger bands on any trading chart, and you won’t have to look long to see the bands grow real close together. Bricklayer’s Volatility Meter will calculate Bollinger Bands Width up to 20 different lengths between lowest and highest input. The idea is that if volatility is decreasing across an increasing number of periods, the market will be ready for different strategies than… This indicator created to identify the strong Support and Resistance levels based on the Bollinger Bands. When two different time frame Bollinger Bands are travelling together then its a strong Support or Resistance Levels.

How this indicator works

SBBWP uses Pine 5 built in functions that I don’t believe were available when The_Caretaker wrote BBPW. We provide a https://trading-market.org/-free environment to practice trading with real market data over the last 3 years. To practice the Bollinger Bands trading strategies detailed in this article, please visit our homepage at Tradingsim.com. Learn to master one strategy before attempting to tackle them all. Any of the strategies mentioned can work given the right market environment and your willingness to honor your trading plan. However, similar to points one and two above, learn how to focus on getting one thing right before complicating things.

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The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break. Developed by John Bollinger, Bollinger Bands® are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes as volatility increases and decreases. The bands automatically widen when volatility increases and contract when volatility decreases. Their dynamic nature allows them to be used on different securities with the standard settings.

Well, I have tried systems that have low win percentages, and I have failed every time. So, if you want to take less action and can seriously handle being wrong eight out of ten times, this system will be perfect for you. The key to this strategy is a stock having a clearly defined trading range. This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far. However, from experience, the traders that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. You can then sell the position on a test of the upper band.

• Meanwhile, the S&P 500 has a bullish appearance with a relative strength above neutral.
• These default parameters set the bands 2 standard deviations above/below the simple moving average.
• Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error.

Another limitation of Bollinger Bands is that the standard settings will not work for all traders. Traders must find settings that allow them to set guidelines for specific stocks that they are trading. If the selected band settings fail to work, traders may alter the settings or use a different tool altogether. The crucial factors here are the price behavior and position of the bands. What is the bands’ position when the prices move across them? These are important to the conclusion you may give to your research.

Like any other trade signal, you will need to exit your position without reservation. So, instead of trying to win big, you just play the range and collect all your pennies on each price swing of the stock. Now, looking at this chart, you may feel a sense of boredom overcoming you. That’s because it’s far more entertaining to tell yourself and others you crushed a 20% day trade in one day.