Bollinger Bands is similar to price envelopes like ATR Bands. Though the difference of Bollinger with many other bands is that Bollinger bands indicator is plotted at specific standard deviation levels. The default standard deviation levels are 2. There is also a mid-band besides upper and lower band. If st.dev. is 2, then the upper band is at +2 st.dev. and the lower band is at -2 st.dev. and middle band at zero. The Bollinger band is invented by John Bollinger and is characterised by the following.
- Sharp price changes tend to occur after the bands tighten greatly due to a decrease in volatility.
- If prices move outside the bands, it is expected that the price will continue in that direction.
- If bottoms and tops are made outside the bands, followed by bottoms and tops inside the bands, price reversal is imminent.
- After a reversal, trend originates at one band and tend to finish at another band. These observations are used to project price target.
These bands are very popular among analysts, traders and investors due to their effectiveness. Kite charts plot this indicator for traders.
How to set up Bollinger Bands indicator in Zerodha Kite?
- Go to MarketWatch.
- Choose the stock you are going to trade.
- Right click on the stock and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to Bollinger bands and click on it.
- A small window opens with default parameters of the indicator.
- Once the parameters are selected, the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price.
- By default, Bollinger bands indicator uses 20-day simple moving average and 2 standard deviations which can be changed as per own requirement.
Bollinger Band in intraday –
- The indicator works well in all the time frames.
- The picture above shows State Bank of India (SBIN) stock price movement with respect to Bollinger band.
- The chart shows 1 min. timeframe.
- The strategy shows the price trend. Understanding price trend from this indicator is important before creating a position.
- In 1 minute chart, traders may find many whipsaws which will be eliminated if longer time frames are used and these bands are used with a combination of other indicators.
The indicator works very well and is widely used in creating bullish or bearish positions. In general, when the Bollinger Bands indicator touches the lower band it denotes that the price reaches the oversold zone and can bounce back and similarly when the price touches the upper band it denotes that the price has reached the overbought zone and can correct from here.
As 90% of price action generally happens inside the bands, the Bollinger Bands indicator works very well in the rangebound markets. On the other hand, it also helps to identify the market trend as well. 2 consecutive closes outside the bands can denote that the market can trend to that direction for some time now and that can denote the start of a strong trend. Its better to use this technical indicator in combination with other indicators.