6 Bollinger Bands® Trading Strategies + Video

Bollinger Bands are a powerful technical indicator created by John Bollinger. The bands encapsulate the price movement of a stock, providing relative boundaries of highs and lows. The crux of the Bollinger Band indicator is based on a moving average that defines the intermediate-term “trend” based on the time frame you are viewing. But how do we apply this indicator to trading and what are the strategies that will produce winning results? In this post we’ll provide you with a solid foundation on the bands, plus six trading strategies you can test to see which works best for your trading style. But before we do, check out this quick tutorial as a primer for the more advanced concepts discussed below

Bollinger Bands Overview

Most stock charting applications use a 20-period moving average for the default settings. The upper and lower bands are then a measure of volatility to the upside and downside. They are calculated as two standard deviations from the middle band.

Bollinger Bands Calculation: [1]

Upper Band = Middle band + 2 standard deviations

Middle Band = 20-period moving average (most charting packages use the simple moving average)

Lower Band = Middle band – 2 standard deviations.

The below chart illustrates the upper and lower bands.

#1 Strategy – Double Bottoms

A common Bollinger Band strategy involves a double bottom setup.

John himself stated [3], “Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as “M” tops and “W” bottoms, momentum shifts, etc.”

The first bottom of this formation tends to have substantial volume and a sharp price pullback that closes outside of the lower Bollinger Band. These types of moves typically lead to what is called an “automatic rally.” The high of the automatic rally tends to serve as the first level of resistance in the base building process that occurs before the stock moves higher.

After the rally commences, the price attempts to retest the most recent lows that have been set to challenge the vigor of the buying pressure that came in at that bottom.

Many Bollinger Band technicians look for this retest bar to print inside the lower band. This indicates that the downward pressure in the stock has subsided and there is a shift from sellers to buyers. Also, pay close attention to the volume; you need to see it drop off dramatically.