Shocking Secrets About Bollinger Bands And Market Volatility

Bollinger are one of the most popular technical studies used today. They are simple and give clear signals which is why so many traders use them on a daily basis. However, their relation to volatility and prices moves may reveal some shocking discoveries. Or at the least give you a little more understand of how they REALLY work in today’s fast moving market.

First, how do you use Bollinger Bands…

Generally, bollinger bands can be applied to any stock, ETF, commodity, or FOREX pair. And what’s even better is that they tend to work in any time frame; from daily, weekly, monthly to intraday. Of course the shorter the time frame you use, the smaller the technical move the stock will make.

The bollinger bands will tend to be narrow or compact when the volatility in the market is low. Visually this can be seen as bands that are clam and close together like in the image above before the breakout. Then, as volatility in the market increases, the bands expand and move away from each other. This signals that a large move is coming or has already begun.

Inside the bands or outside the bands?

The key to using bollinger bands for trading is depends on where the stock is in relation to the bands.

When prices are outside the bands, this is taken as a signal that the trend is most likely to continue. When prices are above the upper band, this is taken as a sign of strength in the market. Prices are moving higher and a fresh bullish move is upon us.

For weak or declining markets the same holds true just in the opposite direction. As prices move below the lower band, this is taken as a sign of weakness in the market. Sellers are pushing stocks lower and it looks to continue for the near future.

The “Bollinger Band Signal”

Since most violent and rapid price moves often tend to happen after the band tightens, it’s safe to assume that those trends will not continue forever. As such, as soon as the stock moves BACK INSIDE the bands, it gives the trader a signal that the most recent trend has lost momentum and could be turning.

As you can see visually on the chart below. As soon as the stock moved back inside the bands a reversal of trend happened very quickly.

The shocking misconception

Most traders actually still believe that a breakout FROM the bands higher/lower signals that the trend is over. This is actually very costly thinking because most often the trend has just started and they are going to get rolled over quickly.

Trading these bollinger bands is one of the most powerful concepts that is available to any trader. But as always, these bands should be traded in conjunction with other technical indicators.