From Basics to Strategy Brilliance🏆

Utilizing Bollinger Bands in Trading Strategy

Author

Jeff Williams
September 10, 2023

Hey Guys and Gals,

This is our final dive into Bollinger Bands. I’ve discussed what they are and how to decipher them, so, how can these bands help us in the real trading world?

Let’s take a look at this chart:

As I discussed in a previous lesson, the dotted blue line is the Simple Moving Average (SMA). It traces the stock's journey over the last 20 sessions.

Why 20? This isn't arbitrary. It's the default setting recommended by the technique's architect, John Bollinger. While most platforms allow adjustments, I trust Bollinger's intuition and stick to 20 days.

And, again, the two yellow bands represent one standard deviation above and below the SMA.

How to interpret what we’re looking at

These bands are your volatility compass. When they expand or contract, they're highlighting shifts in volatility. Remember, options pricing is deeply influenced by volatility.

  • Expansion? It flags a short premium opportunity.

  • Contraction? Points towards a long premium possibility.

  • Pro-tip: Being short premium doesn't demand a bearish outlook.

Look for Breakouts and Trends

If a stock price moves beyond these yellow bands, it's signaling an intense price shift, indicating the stock might be overbought or oversold.

Bollinger Bands also shine a light on trends. A stock consistently hugging the upper band usually indicates an uptrend, suggesting it could stay overbought. Conversely, a stock leaning towards the lower band flags a downtrend, hinting at an oversold phase. However, trends can change; bands contracting is a prelude to a volatility shift.

Please note, validation is key. Every Bollinger signal isn't a green light. I always cross-check with other indicators to validate any signal.

Remember, no tool is perfect, but Bollinger Bands can be a great resource for your trading toolkit.

If you want to learn more and tap into comprehensive options training reserved for my premium subscribers, don't hesitate to find out more here.

Thanks for reading and here’s to your success,

P.S. If you feel you might have a credit or just have a general question, please give Jeff Brown a call at 443-870-4406 or you can email him at [email protected].

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