Bollinger Band Observations

Many traders are aware of the general concepts of Bollinger bands, such as the price action tending to follow a band until a reversal, which then targets the other band. Bollinger bands can reveal much more information than this, however, and here are some concepts which you can use to explore your own interpretations of the chart.

You should never ignore the center line of the bands. Although some people will tell you to expect when the price reverses from the upper band it will continue down until it touches the lower band, fairly often there is some variation in the decline at the centerline, and this may even provide support for another uptrend.

In an uptrend, you should expect the price to remain between the centerline and upper band. If the price drops below the center line, this shows increasing weakness, and you should look for the trend to falter. Conversely, if in a downtrend the price rises above the center line this shows some strength returning to the stock, and interesting action ahead.

By observing the reaction of the band to an approaching price, it is often possible to deduce future price action. While it is helpful to have other indicators as confirmation, you’ll find that the majority of the time the chart will continue as follows -

If the price rises toward the upper band, and in response the band heads further up, then you can reasonably consider that the uptrend will continue and the price keep hitting higher highs, forming the classic Bollinger band chart. However, if the price rises in an uptrend but the upper band responds by flattening down to run horizontally, you can expect that the price may touch or just penetrate the band, but will then reverse. Sometimes the reversal will not be strong, and the band will start back upwards, which may indicate that the price will revert to the upward trend.

When the price is falling, one of two situations may apply. If the lower band scuttles downwards, this indicates that the bearish trend has taken hold, and you can expect successive lower lows. On the other hand, if the falling price is met with a lower band which comes up to the horizontal, this will likely be a reversal point, and the start of an uptrend. The same caveat applies to this as to the previous case. If you find that the uptrend is only progressing weakly, and meantime the low band starts to go back downward, then the bears have won and the downtrend will take hold again.

Constriction in the bands will tend to build up pressure for the price to break out, either upward or downward. While the bands provide good support and resistance levels, it is worth checking these against other natural support and resistance boundaries. Whenever several indicators suggest the same level of support or resistance then it is much more likely to hold.