Futures Trading With Bollinger Bands: An Overview

Originally created by John Bollinger in the 1980s, Bollinger Bands (BBs) are a common public domain technical tool used by active futures traders. Trading with Bollinger Bands in your strategic arsenal will help you regardless of the approach or market you choose toward profitability.

Table of Contents:

What Are Bollinger Bands

Bollinger Bands are technical indicators that let traders find the changing degrees of pricing volatility in a security’s market. Often compared side by side with the price itself using line, OHLC, or candlestick charting, they are applied as an overlay. Regardless of how erratic or quiet price movement may be, BBs’ visual component makes them perfect for quickly identifying market conditions. Three key components make Bollinger Bands:

Periodicity is the “look back” sample by which BB computations are done. Usually used as a baseline, active traders select their period of 20. It might be applied to any length of pricing data, from intraday to annual increments.
The Midpoint of a series of BBs is a moving average. It is determined using the periodicity as well as the high, low, mid, or median of the price bars of the chart.
Standard deviation gauges the degree of price deviations from a known mean value. BB derivations usually employ a 2 standard deviation setting.

The fact that Bollinger Bands are quite straightforward to set and utilize is maybe their most appealing feature. Usually incorporated in the analytical package of most software trading systems, their usefulness is easily applied independent of chart style or length. All you have to do is choose a standard deviation, moving average type, and desired period.

Bollinger Trading: Uses and Interpretation

Bollinger Bands by nature measure and show price volatility. Plotting three lines called bands as an overlay on a price chart helps one to do this. A central line serves as the middle or mean value; outside extremities reflect the positive and negative standard deviation with respect to pricing.

Understanding the idea of Bollinger Bands requires one to address the spatial interaction between outer bands. Most BB strategy applications reflect essentially two main themes:

Market Compression: A compressed market is one in which trade falls within a shortened periodic range. This is shown by the space between outer bands “tightening” or decreasing.
Present Trend: BBs aid in clearly seeing trending markets. The space between outer bands starts to expand when a market points only one way.

The close proximity of the outer rings compresses the market. This points to little participation and delayed price action. Driven by vigorous trading circumstances, the market is trending in a certain direction.

Bollinger Bands Strategy

Bollinger Bands are best utilized accompanying other indicators to guide trading decisions. No one technical study or analytical tool is perfect; the more data a trader has, the better the trade performs. Having said that, here are two original approaches traders might apply a Bollinger Bands strategy:

Rotational Trading: Strategies for range-bound markets can be carried out with the use of BBs. Rotational trading for example, is buying or selling against price activity from outside bands back toward the midway.
Breakouts: A breakout is commonly developing in situations of constrained trading ranges and tightened BBs. Getting in early on a soon-to-be trendy product can be accomplished by entering a market following pricing that has penetrated either of the outer bands.

Conclusion

Finding real-time rock-solid trading prospects is not a simple chore. Still, Bollinger Bands can serve to simplify the process of trend identification and support the effective implementation of rotational and breakout trading techniques.