What is Bollinger Bands, How to read, use & Best Strategies

What is Bollinger Bands, How to read, use & Best Strategies

Bollinger Bands are a widely used technical analysis tool that can help traders identify potential price movements and market trends. In this article, we will delve into the world of Bollinger Bands, explaining what they are, how to use them effectively, and strategies for trading with Bollinger Bands. By the end, you will have a solid understanding of this powerful indicator and be ready to incorporate it into your trading toolkit.

Understanding Bollinger Bands

Bollinger Bands are a volatility indicator created by John Bollinger. They consist of a center line, typically a 20-day moving average, and two standard deviation lines plotted above and below the center line. These bands dynamically adjust based on market volatility, providing a visual representation of price volatility and potential support and resistance levels.

How to Read Bollinger Bands

To effectively interpret Bollinger Bands, it's important to understand their components. When the price moves closer to the upper band, it indicates that the market is overbought, while prices approaching the lower band suggest oversold conditions. Additionally, the width of the bands represents market volatility, with wider bands indicating higher volatility.

Bollinger Bands Calculation and Formula

The calculation of Bollinger Bands involves three key components: the period (usually 20 days), the standard deviation, and the multiplier. The upper band is calculated by adding the standard deviation multiplied by the multiplier to the moving average, while the lower band is obtained by subtracting the same value. This formula ensures that the bands dynamically adjust to market conditions.

How to Use Bollinger Bands

Bollinger Bands offer valuable insights into potential price reversals and breakouts. Traders often use them to identify overbought and oversold conditions, spot trend reversals, and determine price targets. Additionally, Bollinger Bands can be combined with other indicators or trading strategies to enhance trading decisions.

Bollinger Band Strategies.

There are various trading strategies that utilize Bollinger Bands. One popular strategy is the Bollinger Band Squeeze, which identifies periods of low volatility that are likely to be followed by significant price movements. Another strategy is the Double Bollinger Band Strategy, which uses two sets of Bollinger Bands to identify trend reversals and confirm entry and exit points.

Best Bollinger Band Settings

The optimal Bollinger Band settings may vary depending on the market and trading style. Traders often experiment with different parameters to find settings that suit their preferences. Factors to consider include the period, standard deviation, and multiplier. It's essential to backtest and analyze different settings to find the ones that provide the best results.

Bollinger Bands and Other Indicators

Bollinger Bands can be combined with other indicators to create a comprehensive trading strategy. One popular combination is Bollinger Bands and the Keltner Channel, which helps identify breakouts and trend reversals. By using multiple indicators in conjunction, traders can gain a more holistic view of the market. Read here for more financial ratios that could be useful to your investing strategy


Bollinger Bands are a powerful tool in a trader's arsenal, providing valuable insights into price volatility, trend reversals, and potential entry and exit points. Understanding how to interpret Bollinger Bands and applying appropriate trading strategies can enhance your trading performance. By incorporating Bollinger Bands into your analysis, you can make more informed trading decisions and increase your chances of success.

By exploring the concept of Bollinger Bands, their calculation, usage, and trading strategies, this article equips traders with the knowledge they need to leverage this versatile technical indicator effectively.