Best time frame to use bollinger bands

Given the period is smaller — moving average takes into account most recent 10 periods of price data rather than going back 20 periods in the case of the default — the bands are much more responsive to the current price. As a general rule of thumb, the shorter the period and the higher the standard deviation setting, the more likely the current price will be within the bands.

If we extend out the period to and lower the standard deviation to just 1 i. So much previous price data is integrated into the bands that the current price is just 0. Bollinger bands are widely open to interpretation in terms of what they best communicate and vary in terms of how traders deploy them:. Bollinger bands on their own are not designed to be an all-in-one system.

How one interprets them on a chart is very much dependent on the trader. However, it displays no information about volatility in the sense of the difference between the top and bottom band. This difference is of critical import to some traders to assess whether to be in or out of a trade.

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Home Technical Analysis: A Primer. Standard deviation refers to the volatility of the instrument's price movements. This is generally set to 2. The period is the number of intervals that are included in the Bollinger Band calculation. A setting of 20, 2 means the period and standard deviation are set to 20 and 2.

For Bollinger Bands with a setting of 20, 2, the bands are calculated according to the following formulas:. Bollinger Bands can be used on all chart timeframes including weekly, daily, or five-minute charts. The settings can be adjusted to suit different trading styles. When the instrument's price moves towards the upper band, this is a signal that it is overbought.

As a general rule, traders look to sell when they believe an instrument is overbought. When the instrument's price moves towards the lower band, this is a signal that it's oversold. Generally, traders look to buy securities that are oversold. As a trading indicator, Bollinger Bands are not perfect. Consequently, they are best used alongside other similar technical analysis indicators. There are a number of similar indicators that can be used with Bollinger Bands to provide more accurate trading signals. Some of these complimentary technical analysis tools include:.

Moving averages are a popular trading tool. These are used by traders to determine trend direction. A moving average shows the average price of a security over a certain period of time. The basic rule of moving averages is that if a security's price is above the moving average, the trend is up. If the price is below the moving average, the trend is down.

There are also different types of moving averages. These include simple moving averages and exponential moving averages.

What are Bollinger bands?

Stochastic indicators are another well-known technical analysis tool. These are useful for predicting trend reversals.

Stochastics measure the momentum of price movements. Like Bollinger Bands, Stochastic indicators can help traders identify overbought and oversold levels. The average true range ATR is a technical indicator that measures volatility. Originally designed for analysing commodities, it can be applied to other instruments such as indices and stocks.

A security experiencing a high level of volatility will have a higher ATR. A security experiencing low volatility will have a low ATR. Traders use ATR to identify entry and exit points. It can be a useful tool when combined with other trading indicators. Keltner channels are volatility-based indicators that are similar to Bollinger Bands.

The key difference is that Keltner Channels use the average true range to set the band widths, instead of standard deviation. Keltner channels also use an exponential moving average as the middle line. There are a variety of strategies that traders use with Bollinger Bands. Some of the more popular strategies that can help traders in bear or bull markets include:.

In a double bottom, an instrument's price will move sharply lower, with substantial volume, and close outside the lower Bollinger band. It will then rebound higher briefly towards the middle band. Lastly, it will fall lower again, this time on lower volume, and close just inside the lower band. This pattern indicates that downward pressure has subsided. There is a shift from sellers to buyers. Often, the next price movement is a strong move upwards off the second low.

In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In , Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.

Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: "we find significant positive returns on buy trades generated by the contrarian version of the moving-average crossover rule, the channel breakout rule, and the Bollinger Band trading rule, after accounting for transaction costs of 0.

A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results. In , Butler et al. Their results indicated that by tuning the parameters to a particular asset for a particular market environment, the out-of-sample trading signals were improved compared to the default parameters. Security price returns have no known statistical distribution , normal or otherwise; they are known to have fat tails , compared to a normal distribution.

Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices. Just the opposite is true; it is well recognized by practitioners that such price series are very commonly serially correlated [ citation needed ] —that is, each price will be closely related to its ancestor "most of the time". Adjusting for serial correlation is the purpose of moving standard deviations , which use deviations from the moving average , but the possibility remains of high order price autocorrelation not accounted for by simple differencing from the moving average.

For such reasons, it is incorrect to assume that the long-term percentage of the data that will be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount. Practitioners may also use related measures such as the Keltner channels , or the related Stoller average range channels, which base their band widths on different measures of price volatility, such as the difference between daily high and low prices, rather than on standard deviation.

Bollinger bands have been applied to manufacturing data to detect defects anomalies in patterned fabrics. The International Civil Aviation Organization is using Bollinger bands to measure the accident rate as a safety indicator to measure efficacy of global safety initiatives. From Wikipedia, the free encyclopedia. Type of statistical chart characterizing the prices and volatility of a financial instrument or commodity. Kirkpatrick and Julie R. ISBN Archived from the original on