When John Bollinger released the Bollinger Groups Strategy over two decades ago I ended up being skeptical about the longevity.I thought it might last a while and would fade in the sunset like most popular trading strategies almost daily. I have to admit i was wrong and Bollinger Bands became probably the most relied on technical indicators that has been ever created
For all of us who are unfamiliar with Bollinger Bands it's rather an effective indicator. You start with the 20-day Straightforward Moving Average of the closing prices. The top and lower artists are then set two standard deviations earlier mentioned and below this moving average. The bands move clear of the moving normal when volatility grows and move on the moving average when volatility contracts. Many traders period of the moving average depending on the time frame that they use. For today's exhibition we will make use of the standard settings to keep things simple. Notice in this example the fact that bands expand and contract depending on the volatility and the trading choice of the market. Notice how this bands dynamically narrow and widen using the day to day price action adjustments.
There's one additional indicator that works in conjunction with Bollinger Bands many traders have no idea of about. It's actually component of Bollinger Bands but considering that the Bollinger Bands are always drawn for the chart instead regarding below the chart there isn't any logical place to place this indicator when rendering the formula for the actual bands. The indicator is called Band-Width and really the only purpose of this indicator should be to subtract the reducealue in the upper band. Notice within this example how this Band-Width indicator allows lower readings if the bands are contracting and higher psychic readings when bands are expanding.
I've used this Bollinger Bands a number of ways through the years with positive benefits. One particular Bollinger Bands Strategy i use when volatility is decreasing inside markets is this Squeeze entry method. It's a quite easy strategy and works wonderfully for stocks, futures, foreign currency and commodity agreements.
The Squeeze strategy is based on the idea that once volatility lessens for extended intervals the opposite effect typically occurs and volatility expands greatly again. When volatility grows markets usually begin trending strongly in a single direction for much very less time of time. The Squeeze begins using the Band-Width making a 6 month small. It doesn't matter what the particular number is since it's relative only to the market you have been looking to trade and nothing else.
In this example you can see IBM stock reaching the best level of volatility in few months. Notice how the expense of the stock can be barely moving back then the 6 thirty day period Band-Width Low Can be Reached. This may be the time to start to look at markets since 6 month small Band-Width levels normally precede strong directional moves.
In this example you can see how IBM stock breaks outside of the upper Bollinger Band right after the stocks Band-Width stage reached 6 thirty day period low.This is a very common occurrence the other you should begin watching out for on a daily basis. The 6 thirty day period Band-Width low is a great indicator that precedes strong directional momentum.