The Bollinger Band is a technical analysis indicator that provides a range of price levels in which a security or other investment is likely to trade. It is named after its creator, John Bollinger, who developed the indicator in the 1980s.
The Bollinger Band is typically plotted on a chart alongside the underlying security or investment, and it consists of three lines: a simple moving average in the middle, an upper band, and a lower band. The distance between the upper and lower bands is determined by the volatility of the security, and it is typically set to two standard deviations above and below the moving average.
How to trade using Bollinger Bands, you can follow these steps:
Identify the underlying security or investment that you want to trade, and determine the time frame for the trade.
Add the Bollinger Band indicator to your charting software, and adjust the parameters to suit your trading strategy. Typically, the default settings of 20 periods and two standard deviations are used, but you can adjust these as needed.
Use the Bollinger Band to identify potential entry and exit points for your trade. For example, you can buy when the price touches the lower Bollinger Band and sell when it touches the upper Bollinger Band. Check the example of mean reversion strategy using Bollinger Band
Place your trade using a stop-loss order to limit your potential losses, and set a target profit level to take advantage of potential price movements.
Monitor the trade and adjust your stop-loss and target levels as needed.
It's important to note that Bollinger Bands are not a standalone trading system, and they should be used in conjunction with other technical and fundamental analysis tools. You should also always use risk management techniques, such as stop-loss orders, to limit your potential losses.