All About Bollinger Bands®

Market Conditions and Bollinger Bands

Bollinger Bands are used as a technical indicator, that help Retail Traders read stock charts more easily. They are a channel indicator. Channel indicators are lines that are drawn by the computer software program, above and below the price on the chart. The difference between Bollinger Bands and other channel indicators, is that they expand and contract with the dimensions of the Candlesticks or Bar Chart price.

Often times, a beginner who is just learning how to read charts has a difficult time seeing sideways price action, and when a compression pattern is forming. Compressions are important technical patterns to recognize early, because these tight price patterns end with a sudden velocity or momentum run up or down. By using Bollinger Bands which are a line above and below the Candlesticks on the chart, compression patterns are easier to see so that a Retail Trader can prepare in advance for the breakout move.

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A breakout move is when price suddenly moves out of the tight sideways pattern, and runs up or down many points. Bollinger Bands are the best channel indicators to use due to their unique way that the bands expand and contract with price. When these bands become narrow, this is indicative of a compression of price with the potential for a big price move. The tighter these bands the more momentum is likely to occur.

These bands can be placed on Price charts, Candlesticks, Volume Bars, and other line indicators. When using them do not also use Moving Average or Regression Line Indicators on the chart, as this will make it harder to read and identify the Bollinger Band compression patterns.

These are a wonderful channel indicator. However the bands cannot tell the Retail Trader which direction price is going to move. Therefore traders should use additional indicators such as Volume, Dark Pool Large Lot, Hybrid, and Quiet Accumulation/Distribution Indicators as well. These will reveal whether the price is going to break to the upside or the downside. By incorporating other directional indicators, Bollinger Bands analysis improves success for most Trading Styles.

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Keep in mind that Bollinger Bands, are designed for sideways Market Conditions. There are 6 primary Market Conditions in the automated marketplace, and the bands work best for Platforming, Consolidating, Bottoming or Topping, and Moderately Trending Conditions. 

They are not ideal during Velocity or Trading Range Market Conditions as the price action distorts them resulting in patterns that are extreme, and the bands do not react properly to the price fluctuations.

These bands are becoming a popular indicator for many types of traders who depend on breakout patterns to trade. Keep in mind that during certain Market Conditions they will stay close to the highs of Price or the lows of Price, but that is not an exit signal. This happens when the bands are defining the momentum energy during a Moderately Trending Condition.

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Retail Traders who struggle to read Price and Trend on charts will find them useful and helpful. Some traders however find the bands distracting. Using Bollinger Bandwidth as an alternative to Bollinger Bands on Price, is a good option for many Retail Traders who do not like their Price and Candlesticks cluttered with lines.

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Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
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