Bollinger Bands were introduced by John Bollinger, a well-known technical trader. They are used in technical analysis to depict the highs and lows in the price of a security over a defined timeframe. The bands represent positive and negative deviations from the SMA (Simple Moving Average) of a stock's price. They are composed of three lines or bands – the price line in the middle with one line above it and one below. By definition, price is high at the upper band and price is low at the lower band. Bollinger Bands can help you make informed decisions.
o Upper band – 20-day SMA + 20-day standard deviation of price x 2
o Middle band – 20-day SMA
o Lower band – 20-day SMA – 20-day standard deviation of price x 2
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Bollinger Bands are popular with traders for a number of reasons:
- User-friendly: Bollinger Bands can be read easily and are reactive to trading. As a trader, all you have to do is observe Bollinger Band positions over and under the SMA. Experienced traders study different Bollinger Band patterns for trading insight.
- Adjustable: Bollinger Bands are customizable. While they are usually positioned two set deviations away from the SMA, they can be adjusted as desired. You can change the bands to deviations that align with your trading style.
- Confirm trends: Bollinger Bands can help you confirm trends over a period of time.
How are Bollinger Bands & MACD used together?
While the MACD can help indicate the market's movement, Bollinger Bands highlight the sequential nature of the market. Traders use both MACD and Bollinger Bands to support deal arrangements.
Pros of Bollinger Bands and MACD
- Bollinger Bands and MACD are versatile and can be applied to any asset, across any timeframe
- Bollinger Bands naturally provide stop loss levels that coincide with the lower band for long trades and the upper band for short trades
- Both MACD and Bollinger Bands help traders quickly determine the trend and volatility of any market
Cons of Bollinger Bands and MACD
- It's not advisable for novice traders to combine Bollinger Bands and MACDs. If you're new to trading, you'll need to gain a comprehensive understanding of both systems.
- While Bollinger Bands work best in ranging markets, MACD is a trend following momentum indicator. Traders can receive mixed signals if Bollinger Bands and MACD are applied incorrectly.