The Bollinger bands can be termed as a variation of Moving Average Envelopes but unlike the MA version, the Bollinger Bands are not placed at any fixed percentage away from the price. These Volatility bands are placed a fixed Standard Deviation away from a fixed Moving Average of the price. The inventor John Bollinger expressed his preference for a 20 day Moving Average and Standard Deviation of 2. The BB undergoes a cycle of expansion and contraction. A contraction of the BB implies a collapse of the volatility and an impending expansion in the form of a trending move.

Bollinger Band

Advantages And Limitations of Bollinger Band

The major advantage of the BB comes from reading the volatility and using Bandwidth, showing the difference between the two bands inside a fixed range, can give excellent signals for the possibility of a major move. Another big strategy is “Walking the Band” or following the trend as long as the move touched the band in that direction. A strong uptrend will keep testing the upper band all the way to the top and the reverse may be expected in a strong downtrend. The failure to test the upper/lower band can give the initial warning for a probable top/bottom.

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