How To Trade With Bollinger Bands?

Bollinger Band is constructed by two bands surroundings a 20 simple moving average. They expand and contract based on the standard deviation of the moving average. Bollinger Band uses two standard deviations on each side of the moving average enabling 95% of the data to fall between the two bands. It was created by John Bollinger, as shown in figure (1)

During a Strong uptrend, prices will move between the upper band and the moving average. Moving average usually acts as a dynamic support level, as shown in figure (2)

1- Buy signal is triggered when the price breakout the upper boundary, as shown in figure (3)
 

2- Buy signal is triggered when the price bounces up around the 20 SMA, as shown in figure (4)
 

3- Buy signal is triggered when prices bounce up to around the lower band for the first time during the uptrend, as shown in figure (5)
 

During a Strong downtrend, prices will move between the lower band and the moving average. Moving average usually acts as a dynamic resistance level, as shown in figure (6)

1- A sell signal during a strong trend is triggered when the price breakdown the lower boundary, as shown in figure (7)

2- Sell signal during a strong trend is triggered when the price bounces down around the 20 SMA, as shown in figure (8)

3- Sell Signal during a normal trend is triggered when the price bounce down around the upper boundary, as shown in figure (9)

During a sideways market, there will be an equilibrium between buyers and sellers so that prices will move between the upper band and lower band. The sell signal is triggered when the price bounces down from the upper band, and the buy signal is triggered when the price bounces up from the lower band, as shown in figure (10)

Bollinger Band is a volatility indicator. It expands when volatility increases and contracts when volatility decreases. When volatility goes down a lot, the band is squeezed, and usually, this squeeze in volatility is followed by volatility expansion and large price movement. It is very difficult able to determine if the expansion will be to the upside or to the downside during the squeeze as shown in figure (11)

When prices move in, an uptrend usually peaks form around the upper band. When the price forms a higher peak that failed to reach the upper band, meaning buying volatility decreases, and downward correction is very likely. When prices move in a downtrend, usually troughs form around the lower band. When the price forms a lower trough, that trough failed to reach the lower band, which mean selling volatility decreases, and upward correction is very likely, as shown in figure (16)

It is an oscillator that measures the distance between the closing price to the upper band or the lower band. It is a volatility indicator, so when the price makes a new high and the indicator makes a lower low, that is a negative divergence. When prices make a lower low, and the indicator makes a higher low, it is a positive divergence. It is a volatility indicator, as shown in figure (17)

When positive divergence is identified trader should use any candlestick reversal pattern for a buy signal with the first target around the 20 simple moving average and the second target around the upper band and stop loss below the candlestick formation. When negative divergence is identified, traders should use any candlestick reversal pattern for a sell signal with the first target around the 20 simple moving average and the second target around the lower band and stop-loss above the candlestick formation, as shown in figure (18)