How to Make Bollinger Bands Work for Your Trading Style

Bollinger Bands can be adopted and utilized in virtually every technical analysis based trading style.  Whether you are a momentum trader, a bottom or top picker, or a believer in trading ranges, the Bollinger Band will fit perfectly into an already created trading system.

Identify how you trade 

Even traditional investors who do not use technical analysis can use Bollinger Bands as a way to increase their own profitability. 

The first step to applying a Bollinger Band is to identify your own trading style and define how you like to place trades.  For each different type of investor there is at least one way to apply the Bollinger Band to make it work.

The buy and hold investor 

While a long term buy and hold investor is inevitably more interested in fundamental analysis rather than technical analysis, the Bollinger Band can be used as a great tool to find the best entry and exit points.  Long term technical analysis through Bollinger Bands is incredibly accurate to find long term tops and bottoms on chart sizes as large as 1 month bars.  

 
As you can see above in the 20 year chart of the NASDAQ composite, the NASDAQ entered into a long term trading range between the upper limit of the Bollinger Band and the middle moving average.

After the NASDAQ pierced through the Bollinger Band for a few hundred points, the long term investor would have noticed a sell signal.  The next piercing was at the bottom of the Bollinger Band, which is an indicator of a reversing trend.  The market bounced off its 2002 lows to more than double within 3 years.

Picking bottoms and tops 

Finding where the market will bottom and top is made easier by Bollinger Bands.  When the market pushes through the Bollinger Band, the next reaction is usually a large scale fall back to the bottom of the Bollinger Band. 

This can be used on either short term or long term charts to pick relative bottoms and tops of any chart formation. 

In this chart of the GBP/USD Forex pair, the intraday touches of the outer Bands of the indicator all correlate with buy or sell signals.  Upon crossing the line, the market comes back into the Bands to form a strong selling signal. 

Trading ranges 

Bollinger Bands were originally created to show simple trading ranges, just as trendlines and the now defunct envelope indicator. 

However, this is where Bollinger Bands truly shine against other indicators; none work as well as the Bollinger Band to predict the market's trading range. 

Their flexibility in volatile markets has earned them the top spot for finding viable trading trends.

As with any lagging indicator, it often takes time for the trend to form itself on a chart.  On this GBPUSD chart, the prominent trend is upward, and the Bollinger Bands move accordingly. 

When applied to a chart alongside basic technical analysis, such as trendlines or momentum indicators like the MACD or RSI, the effectiveness of trend predictions rises exponentially.