Bollinger Bands® are a technical indicator popular among traders across several financial markets. On a chart, Bollinger Bands® are two "bands" that sandwich the market price. Many traders use them primarily to determine overbought and oversold levels. One common strategy is to sell when the price touches the upper Bollinger Band® and buy when it hits the lower Bollinger Band®. This technique generally works well in markets that bounce around in a consistent range, also called range-bound markets. In this type of market, the price bounces off the Bollinger Bands® like a ball bouncing between two walls.

Even though prices may sometimes bounce between Bollinger Bands®, the bands should not be viewed as signals to buy or sell, but rather as a "tag". As John Bollinger was first to acknowledge, "tags of the bands are just that - tags, not signals. A tag of the upper Bollinger Band® is not by itself a sell signal. A tag of the lower Bollinger Band® is not by itself a buy signal." Price often can and does "walk the band". In those instances, traders who keep trying to sell when the upper band is hit or buying when the lower band is hit will face an excruciating series of stop-outs or worse, an ever-increasing floating loss as price moves further and further away from the original entry point. Take a look at the example below of a price walking the band. If a trader had sold the first time the upper Bollinger Band® was tagged, he would have been deep in the red.

 


Figure 2

 
Bollinger Bands

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