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Integrating Bollinger Bands Into Your Trading Strategy

September 22, 2020 by Daniels Trading| Tips & Strategies

Developed by John Bollinger in the early 1980s, Bollinger Bands (BBs) are a technical trading tool traders use to measure pricing volatility. Vast numbers of equity, forex, and futures traders routinely employ their functionality in countless strategies. If identifying market state and dynamic pricing volatility is important to you, then Bollinger Bands and trading strategy applications are certainly worth a look.

What Are Bollinger Bands?

According to John Bollinger, BBs are a type of “trading band” or “envelope.” In practical terms, Bollinger Bands are two trendlines that depict the standard deviation of price from a predetermined moving average. The beauty of BBs is that their inputs are customizable. The moving average may be simple, exponential, or smoothed; standard deviation values are variable, typically landing in the 2.0 range.

Here’s a brief look at the essential components of Bollinger Bands:

  • Upper band: The upper BB represents a positive variation from a moving average. This value is derived by adding a standard deviation value to the simple moving average (SMA).
  • Lower band: The lower BB is an illustration of negative variation from the moving average. To determine the lower BB, a standard deviation value is subtracted from the SMA.
  • Midpoint: The midpoint is the central value between the upper and lower bands.

Although the math is relatively straightforward, manually calculating BBs in live market conditions is a nonstarter. Fortunately, most software trading suites perform the derivations automatically. The only tasks required are to select a moving average type and a standard deviation value, and robust platforms such as dt Pro do the rest.

Download our free guide, Futures Trading: Technical Analysis for Beginners,  today!

Interpreting Bollinger Bands

Perhaps the single largest advantage of BBs is that traders can use them to quickly identify trending, range-bound, overbought, and oversold markets. Here are a few frequently implemented Bollinger Bands and trading strategy parameters:

  • Bullish trend: Within the context of Bollinger Bands, a bullish trend may be present when a periodic pricing bar closes above the upper band. When this event occurs, traders may hold or enter a long position in anticipation of the uptrend extending. Given this scenario, the distance between the upper and lower BBs is wide, indicating enhanced volatility.
  • Bearish trend: BBs signal that a bearish trend is present when a periodic pricing bar closes beneath the lower band. This event suggests that the downtrend will continue and that holding or entering a short position is appropriate. Like the bullish trend, the space between the upper and lower bands is wide.
  • Reversals: In many instances, a market may be viewed as overbought or oversold when price reaches the upper or lower BB. Accordingly, traders may play a reversal strategy, selling the upper band and buying the lower band. Like the bullish/bearish trend strategies, reversal conditions are optimal when the space between the BBs is significant.
  • Rotational markets: In contrast to trend and reversal strategies, rotational markets may also be traded using BBs. A “slow” market is evident when the distance between the upper and lower BBs is small. To capitalize on the muted action, a trader may sell the upper band and buy the lower band. Stop losses are typically modest, with the profit target being located at or near the midpoint.

No matter what you’re trading, whether it’s WTI crude oil or the Euro FX, you can easily integrate Bollinger Bands into your strategy. You can automatically apply them to any security on any time frame via your software trading platform. When it comes to quickly discerning volatility and market state, BBs are among the most referenced technical indicators in the public domain.

Want to Learn More About Bollinger Bands and Trading Strategy?

In the online space, there are literally thousands of methodologies readily available to futures market participants. Of course, not all are created equal. For legions of active traders, combining Bollinger Bands and trading strategy is a no-brainer.

To learn more about the functionality of BBs and other technical indicators, check out Daniels Trading’s trading guide Technical Analysis for Beginners. In it, you’ll find information that can help you get up and running as a futures market technician in no time.

Read our guide, Futures Trading: Technical Analysis for Beginners

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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