Bollinger Bands are a technical analysis tool that in the 1980s, John Bollinger evolved from the concept of trading bands. “What they do is answer the perennial question of whether prices are high or low on a relative basis. Armed with this information, an intelligent investor can make buy and sell decisions by using indicators to confirm price action.” John Bollinger.  This article is not intended to explain the theories behind the Bollinger Bands, for that you can visit John Bollinger’s site at http://www.bollingerbands.com/services/bb/?page=1 it is rather intended to show you how I use them in my trading strategies.  I use the bands to help determine entry and exit points and I find them to be the most useful indicators of all.


Whatever charts you use there will be a choice of indicators.  Once you choose the indicator the variable can be changed according to your preference.  I generally change the MA preference from the default of 20 to 13.  It narrows the bands and has worked better for me, but there is no strong theory behind it.  

Below is the chart with the bands



I use two different sets of circumstances as entry points.  The first is to catch a trend, and the second is to catch the reversal of a trend.

Catching a Trend

The above chart shows very clearly how the bars climb, or slide down the bands in a strong trend.  To catch those trends I take a transaction when a blue candlestick bar (after close) touches the upper band or when a red candlestick bar (after close) touches the lower band. When the blue bar touches the upper band I go long at the closing price, and when the red band touches the lower band I go short at the closing price.

Looking at the detail from 14th March, when the dollar slide caused the yen to strengthen, the volatility prior to the slide created 4 possible entry points.  

How the transaction would have progressed would depend on your money management strategies and the depth of your stops.  A stop of 150 pips would have covered the fluctuations and taken you happily into the drop for a potential 1,123 pip gain.  However if you trade like I do and have short stops, (I generally use 50 pip stops) the trade would have been a bit more complicated:  
1.    I sold at 1 and was stopped out -50
2.    I bought at 2 but set the stop to break even when it became positive, so sold out at 0
3.    I did nothing at 3 because the bar touches both the top and bottom band and therefore is not considered a trigger.
4.    I sold at 4 at the closing price of 203.28 and closed the transaction when I awoke on Monday morning at 192.74, making 1,054 pips.

All buying and selling is done at the close – the arrows show the closing price.

Catching a Trend Reversal



I identify a trend reversal when the bars move away from the band after crossing it.  In all the cases above it can be seen that the trend was short.  When the bars are blue, showing a higher closing price to an opening price, the direction seems to be changing to long.  I wait until the close of the second blue bar, which must not touch the lower band and then I will go long and buy.   The opposite conditions apply in a change from long trend to a short trend.

Had I not bought at 3. above (I was not yet awake)  I caught it on the beginning of the trend as the price crossed the upper Bollinger band.

Spreadsheet Analysis for February
In February I conducted a spreadsheet analysis on these entry points and have detailed them below.

Buying on Trend Reversal