The Ultimate Guide to Using Bollinger Bands

Many traders have an affinity for prioritizing technical analysis to interpret price action utilizing stock charts. One of the most popular technical indicators that traders use are Bollinger Bands (BBs). These indicators provide multiple functions and are commonly available on most charting and trading platforms to assist traders in making better trading decisions on underlying stock prices.  

What Are Bollinger Bands?

Bollinger Bands are a technical indicator or technical study added to stock charts to visualize price ranges. They were created by John Bollinger in the 1980s and are commonly available on most charting software and trading platforms.

Bollinger Bands display three moving average lines referred to as “envelopes”. 

The upper envelope indicates the upper nominal price range, the lower envelope indicates the lower nominal price range. The middle moving average is represents the midpoint and potential trendline support and resistance.

When watching the context of all three bands, Bollinger Bands also visualize periods of price range compression and low volatility that precede periods of price range expansion and higher volatility. 

Bollinger Bands Envelopes

Why Use Bollinger Bands? 

Bollinger Bands provide price behavior information that diligent traders can use for trend, support, resistance and volatility analysis. 

The trader mindset should embrace a discovery mode rather than trading mode when initially using Bollinger Bands, or any new indicator. This means rather than try to trade right off the bat using BBs, first seek to discover the information they are providing. Only after gauging the functional mechanics of Bollinger Bands can traders convert the information into knowledge that can be used for trading purposes.

The usual configuration is set at 20-periods and 2.0 standard deviation. During extreme volatility periods, a 2.618 standard deviation setting can be more effective. Here’s some of the price information that can be derived with Bollinger Bands.   

Support and Resistance 

The rule of thumb with any price indicator is simple. If a stock’s price is above the indicator, then the indicator is used as support. If the stock’s price is below the indicator, then the indicator is used as resistance. Applying this simple concept to BBs means that upper BBs tend to be the resistance and lower BBs tend to be support. The middle BB act’s as a support if prices hold above it and resistance if prices remain below it. 

Bollinger Bands Support And Resistance

Trends 

The direction of the middle BB can be used as the direction of the trend and the baseline support on uptrends and downtrends.

Bollinger Bands Direction Of The Trend

Uptrends have a rising middle BB with rising upper BBs and rising or expanding lower BBs. 

Downtrends have falling middle BBs with falling lower BBs and falling or expanding upper BBs. 

Consolidation is illustrated by a flat middle BB and flat to compressing upper and low BBs. Consolidation precedes a breakout which precedes an uptrend or a breakdown which precedes a downtrend. Each Bollinger Band has a dynamic price value that updates with the close of each period. 

Bollinger Bands Consolidation

Compression and Expansion 

Bollinger Band compressions are an indication of a tightening price range indicating a consolidation and illustrated by both upper and lower BBs turning inwards. This means upper BBs slope down while lower BBs slope up. This indicates low volatility and a compressing price range, which builds steam and precedes an expansion.

Bollinger Bands Compression

Bollinger Band expansions indicate price expansion as the price range breakout or breakdown triggers ahead of an uptrend or downtrend.   

Bollinger Bands Expansions

How to Use Bollinger Bands 

Bollinger Bands should be use in conjunction with other indicators as part of a complete trading methodology. Here are some trading functions and strategies that can implemented with the information derived from BBs.

Bollinger Band Based Price Targets

Traders in a long position can utilize the upper BBs as upside targets to trim some or all exposure. Since the upper BBs tend to be near-term tops, they are effective profit taking price levels selling into strength. The same applies on shorts utilizing the lower BBs as profit targets to cover some or all of the short position. During Bollinger Band expansions, traders can utilize the middle BB as a trail stop which utilizing the upper and lower BBs as profit taking areas. 

Bollinger Bands Buying Selling Signals Within A Range

Bollinger Band Upper and Lower Envelope Reversions

On the flipside, countertrend trades can be made off the upper and lower BBs if there is enough “meat on the bones”, meaning enough of a price differential from the upper or lower envelope to the middle BB. Be careful if the channel range is small between the middle and upper or lower BBs. Reversion trades should only be player when the ranges are wide enough to justify the risk.

Bollinger Bands Upper And Lower Envelope Reversions

Bollinger Band Trend Entries 

If a stock is uptrending, the middle BB can be used as a pullback entry on uptrends or a pullback entry on shorts in downtrends. It’s prudent to wait for the reversion and deflecting off the middle BB before pulling the trigger. If the middle BB breaks, then a reversal is possible, so patient is crucial to let the market first test the durability of the trend by deflecting the reversions off the middle BBs first. 

Bollinger Band Uptrending Buying Entries

Bollinger Band Stop-Losses

If a long position is initiated, the upper BBs can be used to trim profits, but the middle or lower BBs can be used as trailing stop losses as well. The same applies during downtrends, where shorts can be covered at lower BBs while utilizing the middle BB or upper BB as a trail stop on the rest of the short position.

Bollinger Band Stop Losses

Be Careful with Conventional Statistics Claiming Indicator Inefficiency

It’s easy to find information on the internet regarding “studies” and back-testing results that conclude how a technical indicator was found to be inconclusive, inconsistent and ineffective.  This is a common mistake with various so-called “analysis” that attempt to validate the usefulness of Bollinger Bands (or any technical indicator) with sophomoric back-testing that assigns rudimentary buy and sell triggers without taking market context into the equation.

A clinical approach falls short when compared to firsthand experience that adapts to market context. Bollinger Bands alone are not and should not be the basis of a trading methodology. They should be a component of an overall trading strategy, one tool of many to take on the markets.


The information contained herein is intended as informational only and should not be considered as a recommendation of any sort. Every trader has a different risk tolerance and you should consider your own tolerance and financial situation before engaging in day trading. Day trading can result in a total loss of capital. Short selling and margin trading can significantly increase your risk and even result in debt owed to your broker. Please review our day trading risk disclosuremargin disclosure, and trading fees for more information on the risks and fees associated with trading.

Related Content

How Zero Commission Brokers Make Money

How Zero Commission Brokers Make Money

Zero-commission brokers have been in the news emphasizing the democratization of investing, pitching cost-savings for clients, and helping fuel the momentum of meme stocks. However, some of these brokers have also received criticism for the gamification of the stock...

What is a Sympathy Play in Stocks?

What is a Sympathy Play in Stocks?

Whenever a publicly traded company releases big news that drives the share price up or down, it’s common for the company’s competitors in the same industry to see significant stock price movements as well. These ‘sympathetic’ movements offer a chance for traders to...

What is Smart Order Routing?

What is Smart Order Routing?

In the world of trading, the term “route” refers to the path an order takes to get to the market. While most traditional discount brokers automatically route orders for clients, day trading brokers give clients control over their order flow. If you’re a trader using a...

What is Relative Volume in Stocks?

What is Relative Volume in Stocks?

Volume is a key metric that every trader should be aware of. While trading volume on its own is informative, relative volume is particularly important for trading. Relative volume can indicate when trading interest in a stock is high or low and it may provide signals...

How Stock Market Bubbles Work

How Stock Market Bubbles Work

Every time the stock market goes on an extended bull run, fears of a bubble begin to creep in. Stock market bubbles have the potential to wipe out enormous gains when they pop. So, it’s important for traders to be able to recognize them and to know how to trade when a...

The Ultimate Guide to Stock Market Algorithms

The Ultimate Guide to Stock Market Algorithms

You’ve likely heard the term “algorithms” or (algos for short) used in reference to trading. Algorithms run the markets and are responsible for most of the trading volume in the U.S. stock markets on any given trading day. Let’s take the mystery out of stock market...