How to Use Bollinger Bands®

How to Use Bollinger Bands®

How to Use Bollinger Bands®

Bollinger Bands are a technical indicator that help investors define trends and determine if a stock is overextended and might reverse. Bollinger Bands can also help investors identify and time potential entries and exits.

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Content

0.299 -> Bollinger Bands are a technical indicator that can help you define trends and measure
4.48 -> the volatility of securities like stocks.
6.95 -> In this video, we'll explain how Bollinger Bands are calculated and applied, and address
11.69 -> the benefits and risks of using this indicator.
14.78 -> The bands are calculated using standard deviation from a moving average.
18.9 -> Standard deviation is a statistic used in probability theory and is commonly applied
23.14 -> in financial markets to measure volatility.
25.349 -> In financial markets, standard deviation measures the volatility of returns from a historical
31.099 -> average, or mean, such as a 20-day moving average.
34.68 -> Bollinger Bands are typically plotted two standard deviations above and below a moving
39.219 -> average.
40.219 -> This means about 95% of a security's historical price movement is likely contained within
45 -> the two bands.
46.71 -> This information can help you add context to trends and potentially determine when they
50.71 -> might be overextended and reverse.
53.53 -> Because the bands typically contain about 95% of a security's price movement, it's
58.19 -> unusual , but possible, for the price to move outside the bands.
62.01 -> But when it does, probability theory assumes the security price is likely to revert back
67.18 -> to a moving average, or mean, between the upper and lower bands.
71.52 -> This is called mean reversion and some investors might use it to make trading decisions.
76.5 -> Let's look at an example of how you may be able to identify entry and exit points
81.08 -> using Bollinger Bands.
82.86 -> A potential entry point can be setup when the price of a security falls below the lower
87.17 -> band.
88.17 -> Here, an investor might wait for the price to close back above the band before entering
92.69 -> the trade.
94 -> This is a form of confirmation when applying mean reversion strategies.
97.53 -> A reversion to the mean is complete when the security rises back to its moving average.
102.56 -> Some investors use this as an exit point.
105.59 -> Others might target the upper band as an exit point, which is typically a bigger profit
109.67 -> target and can take longer to achieve.
113.14 -> Investors using the upper band as a target might look for confirmation by letting the
116.72 -> price move above the upper band and then waiting for a close back below the band before exiting
121.9 -> a trade.
123.28 -> The idea is that a break back below the upper band is likely to revert to the moving average.
128.7 -> Some investors look for additional confirmation by considering the slope of the bands.
132.63 -> Put in simple terms, if the bands are sloping up, then the security is in a potential uptrend.
138.08 -> Conversely, if the bands are sloping down, then the security is in a potential downtrend.
142.76 -> So, by referring to the slope, some investors might only take entry points in uptrends and
148.17 -> ignore entry points in downtrends.
150.62 -> Timing entry and exit points in these ways is one of the main benefits of applying Bollinger
154.47 -> Bands.
155.47 -> Additionally, the bands can help investors visualize statistical properties of securities
160.23 -> and help identify when prices move unexpectedly two standard deviations away from a moving
164.92 -> average.
165.92 -> Keep in mind that these deviations can last for long periods of time, which is one of
170.2 -> the biggest risks of using Bollinger Bands.
173.29 -> Remember that probability theory assumes that security prices are mean-reverting, but this
177.67 -> assumption frequently breaks down in the real world.
179.99 -> Here's a typical example of a security that has fallen to its lower band, or two standard
185.85 -> deviations away from its moving average.
187.98 -> Notice how the price continues falling along its lower band before eventually returning
192.37 -> to the moving average.
194.93 -> A mean reversion can take a long time, and during that time, the price of a security
199.4 -> can continue falling.
200.89 -> That's why investors typically avoid taking entry points every time a security falls below
205.93 -> the lower band.
207.65 -> Using Bollinger Bands as a standalone indicator is risky.
211.34 -> For a more balanced approach, an investor might consider using Bollinger Bands to add
215.23 -> context to trends and help time entry and exit points that arise from other forms of
219.91 -> analysis such as fundamentals and the market's overall trend.

Source: https://www.youtube.com/watch?v=AWN-jpnRwJg