**Bollinger Bands Easy Explanation**: Most traders, whether **intraday** or **long term** positional, keep looking for different *strategies*, *techniques*, and *tools*. These tools and techniques help them make better decisions and accurate predictions. However, there is no need to understand all the instruments on the internet to be a successful trader. Instead, select two or three good indicators which work best for you.

Moving average, **Bollinger bands**, and resistance and support indicator are the top ones among them. Today, we’ll understand Bollinger bands and how it works.

Let’s start now!

## Understanding Bollinger Bands

*Bollinger Bands* is an analysis tool which provides better entry and exit signals to the traders. It is the price comprehension of highs and lows on a relative basis. The **Bollinger bands** were developed in 1980 by *John Bollinger*, who was a market technician too.

The tool consists of **three lines** referred to as bands, namely, **upper**, **middle**, and **lower Band.**

Now note that the middle line is the simple moving average, and the other two lines are the standard deviations. Read the complete basics of **Bollinger bands** here.

### How Does Bollinger Bands Work?

If we need to understand how Bollinger bands work, we first need to understand the Bands.

As we said, the **middle band** is the moving average of a specific period.

The other two lines are the standard deviation, generally expressed in percentage. **Standard deviation**, in simple terms, is the **rate of volatility**. In Bollinger bands, it is the deviation from the average price (moving average) line.

Note that the standard **parameters of Bollinger Bands** are (20,2), where the *20 denotes the number of days* for which the moving average is taken, i.e. the middle line. And, the *2 indicates the value of standard deviation* multiplied by two.

### Understand This With Diagram Below

You can edit the parameters as per your need, but it reduces the effectiveness of this tool. For instance, if you will make the standard deviation 1, then most of the crucial entry and exit points would fall outside the bands.

#### But how the upper and lower bands are formed?

**Upper Band =** **20 Day Simple Moving Average** + (**Standard Deviation of price * 2**)

**Lower Band =** **20 Day Simple Moving Average** – (**Standard Deviation of price * 2**)

So, it forms a range where the general conception is price will deviate between the *two upper* and *lower bands*. In other words, generally, the people think that the price line moves in a** fixed pattern**, i.e. after touching the top Band, it would move downwards. And, after reaching the lower Band, it would move upward. Although for many situations, it is true, the price line can just move anywhere.

**It could be** – Moving upwards even after touching the higher Band. **It can also be** – moving downwards with the lower Band, even after reaching it and many more.

Thus, do not be in that thought process that Bollinger bands are wholly accurate. It is a **technical tool** to help and only analyses the past data.

### Calculation On It

**BOLU = MA (TP, n) + m ∗ σ[TP, n]**

**BOLD = MA (TP, n) − m ∗ σ[TP, n]**

**where;**

BOLU = Upper Bollinger Band

BOLD = Lower Bollinger Band

MA = Moving Average

TP = Typical Price = {High+Low+Close}÷3

n = No. of days in the smoothing period

m = No. of standard deviations

σ[TP, n] = Standard Deviation at last n periods of the typical price

**Bollinger Bands Bounce Strategies Rules**

**Rule 1**: Search a currency and should be uptrend and downtrend.

**Rule 2**: Bollinger bands define high as well as low.

**Rule 3**: It may be utilised for pure price patterns to clarify, like W-Type bottoms and M-Type tops.

**Rule 4**: When the costs hit lower Bollinger bands, see the RSI indicators.

**Rule 5**: Take profit target and stop losses.

### How to Trade with Bollinger Bands?

The best method would be trading with Bollinger bands along with some other technical indicators. The most popular ones are **MACD** and **RSI**. Apply all the tools simultaneously and then buy/sell based on the signals.

For example, it might happen that the price line of any stock has touched the **upper Band**, but it has not crossed the RSI or MACD line. So, the better decision would be to keep it for some more time.

Also, one can try to analyse different time frames. For instance, a **day trader** can examine the price using Bollinger bands for 15, 30 minutes, and a 1-hour chart.

So, this way, you would be able to make **better decisions** and **price predictions**. If you want to read about MACD and know the basics, then click here.

### The Bottom Line

The **stock market** is not that simple that you learn a tool or watch a price indicator and start earning. You need to understand the * fundamental nature* of the market and gain a lot of information to make a successful career. It is indeed right that most of the time the

*, but it might not necessarily be true always. Just don’t keep in mind any rigid thoughts and be open to several other indicators too.*

**price moves in between Bollinger bands**Many people claim that once the price touches or crosses the upper Band, then a sharp fall is awaiting. However, remember that any claim or guarantee like this is fake!!!