When the price breaks through the upper or lower band, the trader buys or sells the asset, respectively. A stop-loss order is traditionally placed outside the consolidation on the opposite side of the breakout. Here is a brief look at the differences, so you can decide which one you like better. One technical indicator is not better than the other; it is a personal choice based on which works best for the strategies being employed.
Traders can also add multiple bands, which helps highlight the strength of price moves. Another way to use the bands is to look for volatility contractions. These contractions are typically followed by significant price breakouts, ideally on large volume. While the two indicators are similar, they are not exactly alike.
Bollinger Bands. Fundamental Analysis. Technical Analysis Basic Education. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. Calculation of Bollinger Bands. Overbought and Oversold Strategy. Multiple Bands for Greater Insight. A Tool for Trend Traders and Faders. Bollinger Bands Squeeze Strategy. Bollinger vs. The Bottom Line. The bands are often used to determine overbought and oversold conditions.
Using only the bands to trade is a risky strategy since the indicator focuses on price and volatility, while ignoring a lot of other relevant information. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
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In this example, the upper band will be used as the take profit level. As mentioned previously, when the bands contract volatility is low and vice versa. Highlighted in green shows these breakouts in an uptrend. Traders will look to enter at the indicated green circles. After the breakout candle the bands expand implying greater volatility in the market. The black shaded circles illustrate the point at which traders will look to take profit before looking for further breakout signals.
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Bollinger Bands are. Another strategy to use with Bollinger Bands® is called a squeeze strategy. A squeeze occurs when the price has been moving aggressively then starts moving. Bollinger Bands are a popular technical indicator which use standard deviation to establish where a band of likely support and resistance levels.