Using Bollinger Bands to Idenify Trends for Financial Spread Traders

Strategy Ideas - Using Bollinger Bands To Identify Trends

Long term trends can be fairly easy to identify with moving averages stochastics etc. When trading intraday these trends can be far harder to pick out since the movements can be far more sporadic.

Bollinger bands are designed specifically for working with trends and reversals and for tracking market volatility. They work very well away from the longer time frames to which most indicators are suited.

The band consists of a central exponential moving average line which identifies a core trend. Above and below this are drawn lines based on the standard deviation of the financial instrument.

The standard deviation lines are used as visualisations of the volatility of the instrument - the wider the band the more volatile and instrument is perceived to be. Figure 1 shows an intraday example of the FTSE100 with a Bollinger band superimposed

Figure 1. Bollinger Band Example

When the stock moves around the upper band the stock is perceived to be overbought and a selling opportunity exists and, conversely, when the price reaches the bottom of the band a buying opportunity presents itself.

Bollinger bands can also be used in tandem with other indicators such as stochastics to try and indicate turning points.

As with all moving average type methods, the Bollinger Band suffers from the fact that it is a lagging indicator and is presenting to all intents what has already happened. Properly tailored though it can provide a very useful basis for an entry and exit strategy.

Note: The strategies shown here are for information purposes. Any strategy should be adapted to a user's own profile. All strategies should be tested before being put into use. Strategies cannot be guaranteed to work in all circumstances. We can accept no responsibility for losses incurred.