Common uses of Bollinger Bands in trading
The Bollinger Bounce
Bollinger Bounce, as the name suggests is the rebound in Bollinger bands.
The price usually tends to return to the middle zone of the Bollinger bands, much more in periods when the market moves sideways or in ranges. This idea can be useful in our trading to determine high and low points as well as entry and exit levels in the market.
The reason this rebound happens is because Bollinger bands act as minor supports and resistances. In price charts with higher time frame (H4, D1) the resistances and supports represented by the upper and lower Bollinger bands respectively, will be stronger than in charts with shorter period. Remember that in strong market trends the Bollinger bounce will not work.
Following the Bollinger Bounce we can have two situations:
- the price rebound in the upper band towards the middle zone
- the price bounce in the lower band towards the middle zone.
The Bollinger Squeeze
We have seen the Bollinger Bounce that works very well in markets with lateral movement, but how the Bollinger bands will perform in markets with strong trends?
As we said, the Bollinger bands provide a lot of information on market volatility and the trend. An effective way to combine both data is through the phenomenon Bollinger Squeeze.
In markets with strong trend movements a good entry occur after a period of calm, a period that will be indicated by a contraction of the Bollinger bands since during that period the volatility decrease.
When there is a period where the market has low volatility and little movement, the Bollinger bands will shrink forming a narrow, almost horizontal channel. In this situation it is expected that a breakout to one side or another takes place sooner or later. If the price breaks the level marked by the lower band is expected to continue is bearish movement. Similarly, if, after the formation of this narrow channel bounded by Bollinger bands, the price exceeds the level set by the upper band, it is expected that the price continue to rise. Here is an example of breakout of a lower band.