Bollinger Bands Indicator Explained – Here’s What You Need To Know!

Bollinger Bands Indicator Explained | Coffee With Markus | Episode 97

Intro: 0:00
What’s Happening In The Markets: 1:39
Bollinger Bands Indicator Explained: 4:50
Deep Dive Q&A: 14:09
Q: So Markus, how should one factor in “daily events” which seem to be a “Fundamentals” analysis on the economy, with technical analysis? 14:46
Q: What are the parameters to setup the Bollinger Bands: 16:54
Q: What does it mean when the upper, and the lower bands are getting closer? 17:46
Q: What is the difference between the Bollinger Bands, and Bollinger Bands Width? 22:05
Q: Can the middle band be used to filter the market? 27:04
Q: How do the Bollinger Bands compare to the Keltner Channels? 29:35
Q: Can we change the band settings to 3 standard deviation to be more conservative? How would it work in swing trading? 38:34

Have you ever heard of Bollinger Bands before? Bollinger Bands are a very powerful indicator but most traders are using it the wrong way. So today I’m going to show you the way that I’ve used them in my trading.

So the Bollinger Bands are actually a pretty simple indicator when you ‘look under the hood’. What you’ll see is that they’re a moving average and two standard deviations. Looking at my charts, you can see the Bollinger Bands with the moving average in the middle with the standard deviation lines on the top and bottom. If you open the settings of the Bollinger Bands, it has 3 different settings you can adjust:

– Length: Typically you see 20 or 21 days as the standard Length setting
– Standard Deviations: The default is 2 and that’s what we’ll stick with to start

Now as I mentioned earlier, most people are using them in the wrong way. Most people use the them as a so called “trend fading system.”

Let’s take a look at IBM which we talked about in our previous example, where I went through what Support & Resistance is. If you didn’t catch that video, you can watch it here: https://youtu.be/gfKnDSjAzvA

Looking at a chart of IBM with the Bollinger Bands plotted, you’ll see that the stock tends to trade within the bands the vast majority of the time. Based on the settings I showed earlier, means that 98% of the time price stays within the Bollinger Bands.

Because of this you see people typically trading them in this way:

– When price goes above the top Bollinger Band they use this as an indication of a time to short the stock.
– Or when the price goes below the bottom Bollinger Band this is looked at as a time to buy the stock, expecting price to return within the bands.

Now in a sideways market, this looks like it could be a viable strategy, but now let’s take a look at what I believe is the most powerful way to use them in a trending market.

An easy way to do that will be to just look at the Nasdaq (NDX).

You will see that often price is touching the upper band, when the stock, ETF or whatever is trending. So how do you use them with a trending market?

If the market is in an uptrend, you will see that the upper band is turning up and prices are touching the upper Bollinger Bands. For how long? Until the upper band starts to turn around.

In a downtrend, this when the lower band acts like a trendline below the price. If we zoom in a little bit, you’ll see it a little easier. When the band starts to point lower and price is touching this band, this is a confirmed downtrend. Then when this band starts to flatten or turn around, the downtrend is over.

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