Targets
One of the simplest uses of the Bollinger Bands is to think of them as price targets. For example, when in May the prices bounced off the lower band and then rose past the moving average, the upper band became a price target. You can see that the prices followed it fairly closely through June. The moving average, the centre line, is considered an intermediate target, but once it is passed then the opposite band is usually reached.
More generally, in an uptrend you can expect the prices to fluctuate between the moving average and the upper band, and in a downtrend the prices will be between the moving average and the lower band. This shows clearly in the chart above. If the moving average is crossed, it warns that the trend may be changing.
Volatility
As mentioned, the bands are drawn with the distance from the moving average line depending on the current price volatility. This means that the size of the bands expands and contracts across the chart. Usually if the band gets narrow, indicating constraint to the price range, the market is about to breakout and start on a new trend. When the band gets wide apart it warns of a slowing in the current trend.
As with most technical analysis, Bollinger Bands can be used in different timeframes, and can be valuable when looking at longer term trends over periods of years. We’ll come to it later when talking about a trading system in Module 11, but you will usually want to combine two or three indicators in your plan, from different parts of the data such as momentum or volume, so that you have confirmation of your trades.
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