how to trade with bollinger bands
option traders and investors use bollinger bands to assess market volatility and identify potential entry and exit points the tool is premised on the idea that prices tend to remain within the bands upper and lower limits one use is for trend analysis the direction of the middle band can indicate a trend s strength when the middle band is heading upward this suggests an uptrend and the converse when heading downward in addition the width of the bands reflects market volatility narrow bands indicate less volatility which means a significant price move could be imminent this is known as a squeeze conversely wide bands indicate more volatility 5another way to use the tool is to figure out when an asset is overbought and oversold as the price touches or moves outside the upper band it could be overbought suggesting a potential selling or short opportunity similarly if the price touches or falls outside the lower band the asset may be oversold indicating a possible buying opportunity the bands can also help find price targets for instance after a price bounces off the lower band the upper band becomes a potential exit point if the price trend reverses likewise after a price move that touches the upper bands the lower band becomes a possible target if a reversal occurs another strategy is called the bollinger bounce this is based on the idea that prices tend to return to the middle band traders may buy or sell based on the rebound from the upper or lower bands toward the middle band especially in a ranging market 6below is a table of different ways the bollinger bands can move what they indicate and how traders often react we then go through these moves in more detail so you understand the strategies better using two standard deviations in constructing bollinger bands is based on the statistical properties of the normal distribution and the concept of volatility in this context standard deviation measures how far prices typically deviate from sma the middle band 2by setting the upper and lower bands two standard deviations away from the sma bollinger bands create a range expected to contain approximately 95 of the security s price movements over a given period this assumption is based on the statistical rule that about 95 of the data points will fall within two standard deviations of the mean for a normally distributed data set choosing two standard deviations provides a statistically significant measure of volatility while remaining practical for market analysis the bands can adapt to changes in volatility making them suitable for various market conditions 