(4) Simple Moving Average Can Be Modified To Meet Trading Style
It is one of the most significant characteristics of Bollinger Bands in technical charts. Bollinger Bands® are usually set for 20 day simple moving average along with 2 standard deviations by default.
These settings are really great for those who are trading on daily or weekly charts. But, for day trading, it will be better to shorten the number of bars used for moving average.
According to the suggestions of John Bollinger, a setting of 9-12 will be best for day trading. For example, it is common to use 20-day for position trading and 10-day for swing trading.
Similarly, short-term traders may use them on 5-minute bar charts, and swing traders may use them on hourly or daily charts. On the other hand, investors may use them on weekly charts.
It should be tuned as per the user’s criteria for risk & reward. Thus, it will be best strategy to first test each setting period before using the bands in live trading.
[Read Also: 10 Reasons To Buy Stock Trading In Very Tight Range]
(5) Bollinger Band Squeeze Is Triggered When Volatility Reaches Six-Month Low
It is one of the most basic guidelines of using Bollinger Bands in technical analysis. Bollinger band squeeze is a chart pattern that occurs when volatility falls to lower levels.
It is usually characterized with narrowing of Bollinger Bands. This squeeze pattern is triggered when volatility reaches a six-month low. It can be identified when the bandwidth is at six-month minimum distance apart.
This trading pattern foreshadows a big move on either side. Therefore, it can be compared to calm before the storm.
On the other hand, Bollinger Bandwidth increases when volatility of a security or bond is increasing. Bandwidth is furthest apart when the price makes a top or bottom.
This shift in volatility occurs due to the fact that securities or bonds alternate between the periods of low volatility followed by periods of high volatility.
- Bollinger Band Analysis: MSGraphics