How to trade using Bollinger Bands

By | January 31, 2015

You might have heard the saying “The Trend Is Your Friend” and that you should “Trade The Trend.”

But sometimes this is easier said than done. In this article I will show you an easy easy to identify and trade the trend.

How To Identify A Trend

Way back in the 90s I used fundamental analysis to try and predict the market. Long story short, it didn’t work for me.

Since the mid 90s I have been using technical analysis in my trading. When using technical analysis, there are two different approaches:

  • Chart Patterns and
  • Indicators

Examples of chart patterns are flags, pennants, triangles, double bottoms and tops, etc. Candlestick formations are chart patterns, too.

Examples of indicators are moving averages, Bollinger Bands, MACD, RSI, etc.

So which approach is “better”? Should you use chart patterns or indicators to identify the direction of the market?

Easy answer: Use the approach that works for YOU. I personally use indicators. I like the black-and-white approach of indicators. As an example, the RSI is either above 70 or it is not. There’s no grey area. I openly admit that I struggle identifying chart patterns while they are forming. Don’t get me wrong: I am an expert showing you every single chart pattern there is at the end of the day. But I can’t identify them with certainty while they are forming. But hey, I can’t ride a bicycle either, so maybe there’s something fundamentally wrong with me 😉

Using Indicators To Identify The Direction Of The Market

In my own trading I use THREE (3) INDICATORS to determined the direction of the market and trade the trend.

Today we will talk about the my favorite indicator – Bollinger Bands. Bollinger Bands are a fascinating concept. They are available in EVERY charting software.

Note: If your charting software does NOT allow you to plot Bollinger Bands on your charts, it’s time to switch to a different software provider. Let me know if you need help finding a powerful charting software platform

Back to Bollinger Bands. Bollinger Bands consist of a CENTERLINE, which is a simple moving average, and two standard deviations. One above the centerline and one below. These are called the UPPER BOLLINGER BAND and the LOWER BOLLINGER BAND.

I like to use a setting of 12 for the moving average and a setting of 2 for the standard deviation.

And here’s how to use Bollinger Bands to identify and trade the trend:

In an uptrend you will see that the Upper Bollinger Band in pointing up in a nice 45 degree angle and prices are touching the Upper Bollinger Band. The Upper Bollinger Band acts like a trendline ABOVE the prices.

Trade-The-Trend-With-Bollinger-Bands-Example-1

So how do you know when an uptrend is over?

The uptrend is over as soon as the Upper Bollinger Band flattens or turns around.

Trade The Trend With Bollinger Bands Example 2

In a downtrend you will see that the Lower Bollinger Band in pointing down in a nice 45 degree angle and prices are touching the Lower Bollinger Band. The Lower Bollinger Band acts like a trendline BELOW the prices.

Trade The Trend With Bollinger Bands Example 3

And the downtrend is over when the Lower Bollinger Band flattens or turns around.

Trade The Trend With Bollinger Bands Example 4

Can YOU Identify And Trade The Trend?

Try it out for yourself!

  1. Pull up your charting software, plot the Bollinger Bands on the charts with a setting of 12 for the Moving Average and 2 for the Standard Deviation
  2. You can use it with ANY timeframe, but if you are day trading, you might want to use a five (5) minute chart.
  3. Look at the current value of the Upper and Lower Bollinger Bands. Based on the definition that I gave you above, what is the market doing right now? Is it in an uptrend or in a downtrend?
  4. Now look back at charts. Can you see how the Bollinger Bands are showing you how to trade the trend?

You shouldn’t have ANY difficulty to determine whether a market is going up, down or sideways based on this simple definition. If you do have problems, let me know and I’ll be happy to help.

Keep in mind that this is NOT a trading strategy in itself! It’s just a way to determine the direction of the market and identify a trend.

Summary

You can use chart patterns or indicators to help you identify and trade a trend. I personally rely on indicators because for me they are more “black and white”.

My favorite indicator are the Bollinger Bands. They offer me an easy way to determine whether the market is trending or going sideways.

 

By Alex My friend from Spain

38 thoughts on “How to trade using Bollinger Bands

  1. Bramesh Post author

    Please right click on images and it will load in separate window

  2. Jagannathan Srinivasan

    Thanyou for your valuable idea.I used to see the chart by economictimes chart where i used to plot bolinger brandhttp://economictimes.indiatimes.com/markets/technical-charts?symbol=NSE%20INDEX&exchange=NSE&entity=index&periodicity=15.But the time frame is available for 15 mts only.How can i change it sir

  3. Bramesh Post author

    This is based on Rockwell trading software. I have sent u course details

    Rgds,
    Bramesh

  4. Bramesh Post author

    Every indicator has its own limitation thats why we use only price to trade and use this as trade confirmation.

    Rgds,
    Bramesh

  5. Bramesh Post author

    Amibroker/Motivewave/Chartnexus/Metastock

    Rgds,
    Bramesh

  6. Bramesh Post author

    Chart nexus is basic software and its gives u EOD data only.

    Other s/w are advanced levels and can be used to writer your trading system code also.

    Rgds,
    Bramesh

  7. Bramesh Post author

    Price is only leading indicator, I consider all Indicators as lagging and use them only for trade confirmation near for ” Trade Initiation”

    Rgds,
    Bramesh

  8. Bramesh Post author

    Every trader has its way of looking at technical.

    We chose 12 MA as it suits our trading personality.

    Rgds,
    Bramesh

  9. Sudheer Raj

    Great. You have made it so simple, and easy to understand. Thanks

  10. Publicum

    John Bollinger himself talks about the middle band as 20 MA. His webinar can be found on YouTube at this address — https://www.youtube.com/watch?v=MqvotVMEMN0
    But in this writeup 12 MA is preferred along with a 5-minuute chart for intraday trading. It would be very helpful if it Is possible to explain why 12 MA and 5-minute chart is used?

  11. Johnson

    Thanks for the really useful write up on Bollinger Band. Would appreciate if you could throw some light on whether BB is a lagging Indicator or if it could be interpreted to also know the anticipated forward movement. Best Regards

  12. RAJNISH KUMAR Sharma

    Sir,
    What is the difference between the software provided by the broker and chart nexus/Amibroker/Metastock and how these Help a trader to trade berter.

  13. ramesh

    Sirji plz suggest which software shall we use coz i already lost 16 lacs in option since 3 years. So as soon as possible post the software name.now i m trading in future with ur scripts which u post everyday.. Thanks a lot

  14. aajdaz

    TRADES take place above upper BB in all time frames and also EOD.(please treat this as continuation of previous query)

  15. prakash tanak

    Very well written.You have made it so simple. Hats off to you. Which 2 other indicators do you use?

  16. aajdaz

    the difficulty in BB is market trades above upper band and still no correction appears. it happened last 4 to 5 trading sessions. how to go/interprete if daytrading or positional trading. please guide which helps many BB BASED TRADERS.

  17. vikas

    Please suggest software or site where these graphs can be prepared. Also I am interested in doing a cource which can help me to trade in a better way.

  18. lillyvemula

    hi when we trade using bollinger bands can we use the avg line for determining the correct uptrend and downtrend.

  19. dazzling01

    Very insightful. What are the other two indicators that you have mentioned in your article? Thanks, Vivek

  20. Pratheesh R

    Thanks for sharing the details of Bollinger bands . Can I use this indicator on EOD data. If so how it can be used?….

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