22 Rules for Using Bollinger Bands by John Bollinger

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How to accurately use the Bollinger Bands indicator?

Below are insights from John Bollinger and his team, derived from 30 years of experience with this indicator. While Bollinger Bands can be used in various ways, these rules can be effectively applied.

1. Bollinger Bands provide a relative definition of high and low prices. When prices touch the upper band, they are relatively high; when they touch the lower band, they are relatively low.
2. This relative definition can be used to compare price action and indicator behavior to make rigorous buy and sell decisions.
3. Indicators based on momentum, volume, market sentiment, open interest (OI), and intermarket data can be constructed to complement Bollinger Bands.
4. If using multiple indicators, they should not be directly related. For example, a momentum indicator can be used with a volume indicator, but two different momentum indicators may not offer additional value.
5. Bollinger Bands can be used in pattern recognition to identify or clarify price patterns such as M-tops and W-bottoms.
6. Price signals outside the Bollinger Bands are not trading signals. A price crossing the upper band is not a sell signal, and a price crossing the lower band is not a buy signal.
7. In trending markets, prices can walk along the upper band or lower band.
8. A close outside the Bollinger Bands indicates a continuation in the short term, not a reversal. This underpins many successful breakout trading systems.
9. The default parameters (20-period moving average and bands at 2 standard deviations) are just defaults. Actual parameters may vary across different markets.
10. The middle moving average of the Bollinger Bands does not generate signals when crossed. It describes the intermediate trend.
11. If you extend the moving average, the width of the bands needs to be adjusted. For example, if you change the 20-period MA to 50, increase the bands from 2 to 2.1 standard deviations. Conversely, shorten the MA to 10 and adjust the bands to 1.9 standard deviations.
12. Traditional Bollinger Bands use a simple moving average (SMA) because the SMA is also used in calculating standard deviation, ensuring logical consistency.
13. Bollinger Bands based on an exponential moving average (EMA) will smooth sudden changes in band width caused by large price changes. In this case, calculate standard deviation based on the EMA.
14. Do not make statistical assumptions based on using standard deviation to construct Bollinger Bands. Price distributions do not follow a normal distribution, and sample sizes in Bollinger Bands are typically too small for statistical significance. (In practice, 90% of price data lies between the outer bands of Bollinger Bands.)
15. The %B indicator tells us the relative position of the current price within the Bollinger Bands, calculated as follows:

B=(UB−LB)(C−LB)​

Where C is the current price, LB is the lower band, and UB is the upper band.

16. %B has many uses, including identifying divergences, pattern recognition, and coding trading systems using Bollinger Bands.
17. Other indicators can also be normalized with %B by constructing Bollinger Bands for the indicator itself and then calculating the %B of the indicator.
18. The BandWidth indicator measures the width of the Bollinger Bands. Using default parameters, BandWidth is four times the standard deviation.
19. BandWidth has multiple uses, the most common being identifying band squeezes, but it is also useful for detecting trend changes.
20. Bollinger Bands can be used on most trading instruments, including stocks, indices, forex, commodities, futures, options, and bonds.
21. Bollinger Bands can be applied to various timeframes, such as M5, H1, D1, and even weekly charts. It’s crucial that the data be sufficient to provide a clear picture of price behavior.
22. Bollinger Bands do not generate continuous signals; instead, they help identify setups that are advantageous for entering trades.

By adhering to these rules, traders can effectively leverage Bollinger Bands to enhance their trading strategies and decision-making processes.