Bollinger bands are one of the most popular technical indicators for traders in any financial market.  Some traders will swear that solely trading Bollinger bands is the key to their winning systems.

Bollinger bands were developed by John Bollinger using standard deviations above and below the simple 20-day moving average line. Bollinger bands actually use a mathematical formula to ensure that 95 percent of the price data will fall between the two bands….but riding the upper Bollinger band, known as “walking the band” has proven to be a powerful directional indicator.  

When stocks close above the Bollinger Bands during an uptrend this could be a continuation signal, not reversal signal–as is confirmed by the use of Bollinger Bands in some very successful volatility-breakout systems.

At a glance, traders can determine if a stock is trending upward, downward, or sideways. Overall, Bollinger bands are known to display (1) the price movement of a symbol (2) the level of volatility (3) the strength of a trend.

Buying on the break of the lower Bollinger band

Buying on the break of the lower Bollinger band is a simple strategy that often works. In every scenario, the break of the lower band was in oversold territory. The timing of the trades seems to be the biggest   issue.  Stocks that break the lower Bollinger band and enter oversold territory face heavy selling pressure. This selling pressure is usually corrected quickly as the stock is headed back past the middle Bollinger band and towards the upper Bollinger band.  But at that point the stock could also continue its downward trend if other traders do not accumulate.  To help prevent this, investors must perform due diligence to determine if the stock could have the demand of other savvy traders, which could be influenced by company news announcements or related industry developments.

Walking the Band – My Favorite Strategy!

Price of a stock often can and does “walk- the- band”.  Stocks following or “walking” along the upper Bollinger Band provide good signals for those wishing to trade trending or directional stocks – the idea here is to trade in the continuing direction of the stock.

In fact, the single biggest mistake that many Bollinger band rookies make is that they sell the stock when the price touches the upper band or conversely buy when it touches the lower band. Bollinger himself stated that “a touch of the upper band or lower band itself does not constitute a buy or sell signal.” Not only have I seen, but I have also traded this Bollinger band strategy as a continuation trade. Hence, you can actually trade in the direction of a stock that is closing above the upper band.  

In its most beautiful form, the candles are being sliced by the upper Bollinger band while it is trending in a 30 – 45 degree angle.  But either way, when the line is moving in that angle many profits could be generated.  You will likely notice that other simple and exponential moving averages will follow that same trend.