Mastering the Art of Bollinger Band Trading
Bollinger Bands are three lines on a price chart: a middle line (usually the 20-day simple moving average) and upper and lower bands set two standard deviations above and below it. The bands widen when prices are volatile and narrow when they are calm. Traders read a close near the upper band as strength or a possible overbought condition, a close near the lower band as weakness or a possible oversold condition, and a narrow "squeeze" as a sign that a larger move may follow; none of these is a reliable signal on its own. In Excel with MarketXLS, the upper band is =SimpleMovingAverage("AAPL",20)+2*StandardDeviationOnClosePrice("AAPL",20). This article is educational, not investment advice.
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What are Bollinger Bands?
Bollinger Bands are essentially lines that are plotted two standard deviations away from a simple moving average. The bands illustrate the volatility of the security’s price. The upper band is a measure of the high or resistance level and the lower band is a measure of the low or support level.
How To Use Bollinger Bands?
Bollinger bands can be used to identify breakouts, which indicate potential entry or exit points for trades. Some traders treat a touch of the upper band as overbought and a touch of the lower band as oversold. In strong trends, however, prices can ride along one band for a long time, so many traders confirm with another indicator such as RSI before acting.
Types Of Bollinger Bands
There are three main types of Bollinger Bands: Simple, Exponential, and Weighted. Each type utilizes different calculations to determine the bands. Simple Bollinger Bands are calculated using simple calculations, whereas Exponential and Weighted Bollinger Bands utilize exponential and weighted calculations respectively.
Bollinger Band Indicators
Bollinger Bands consist of three components: an upside band (resistance level), a downside band (support level), and a middle line. A trader can use these components in combination with additional technical indicators to identify and take advantage of key market movements.
For example, when the price of a security moves significantly above or below the upper or lower band, it is likely to return to the mid line. When using the Bollinger Bands technique, traders should look for support and resistance levels. Additionally, traders should identify patterns in the chart and use those patterns to determine potential entry and exit points.
Using MarketXLS for Bollinger Band Trading
MarketXLS lets you calculate Bollinger Bands for any stock or ETF in Excel with two functions:
- Middle band:
=SimpleMovingAverage("AAPL",20) - Upper band:
=SimpleMovingAverage("AAPL",20)+2*StandardDeviationOnClosePrice("AAPL",20) - Lower band:
=SimpleMovingAverage("AAPL",20)-2*StandardDeviationOnClosePrice("AAPL",20)
Compare the result with =Last("AAPL") to see where the price sits within the bands. On Excel for Mac or the web, add the mxls. prefix to each function.
Conclusion
Bollinger Bands show where price sits relative to its recent average and volatility. Use them with other indicators rather than as a standalone buy or sell signal. For more, see the MarketXLS Bollinger Bands guide and the technical indicators page.
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Relevant blogs that you can read to learn more about the topic
Bollinger Bands Trading Strategy
Technical Indicators – Meaning & Application
Technical Indicators For Swing Traders (Using Marketxls)
Charles Schwab-Portfolio Management And Exporting To Excel
