Bollinger Bands are one of the most popular technical indicators available today
They can be used to discover areas where a stock is potentially overbought or oversold
or as a way to measure volatility. Today we'll be discussing how the study is actually calculated
go through a few real-life examples of how you guys can use it in your trading
and towards the end we'll even discuss how to create a very simple scan to actually find a recent Bollinger Band crossover
Beginning with the calculation of the Bollinger Bands themselves, our first step is by finding the simple moving average of the stock that we're looking at
Traditionally you'll be using the 20-period simple moving average, but that can be adjusted
The moving average line itself will simply be the average price of the stock over the last 20 periods
This SMA line will actually appear as the center line of the Bollinger Bands themselves
Now once we actually have the SMA figured out, we'll then move on to the upper and lower bands of the Bollinger Bands themselves
We'll find these by calculating a two-standard deviation move to either side
These standard deviation lines will measure how far price action has deviated from our mean
It's also an incredibly simple way to see the volatility in the stock
These bands will actually expand or deviate from the SMA line during times of high volatility
and then can swath or get tighter during those times of low volatility
In the case of the Bollinger Bands, since they encompass a two-standard deviation move to either side
they're actually telling you that 95% of the trading activity will take place between those two bands
Again, it's not super important to know the calculation themselves to actually understand the studies
but that should be enough to ensure you know what it is you're looking at here. I'll also mention that in order to add and customize the Bollinger Bands themselves to your chart
you simply need to come up here to the Studies menu in the upper right-hand corner
From there you guys can see that I obviously already have the Bollinger Bands on my chart right here down below
but if you haven't added them yet, you would simply come over here to the search box on the left-hand side
and go ahead and type in Bollinger Bands. Looking down below, you would simply find it in List, go ahead and select it
and then hit Add Selected down in the lower left-hand corner. From there, if you guys needed to edit the parameters of the Bollinger Bands or change the overall appearance of them
you could of course come over here to the little gear icon on the right-hand side and open up the Settings menu
This will then allow you to change the number of deviations if you wanted to change that
Currently it's a two standard deviation move to either side, but of course you guys could change that
And then right below that, you can actually change the overall appearance settings as well
Now in my case, you can see the FMA line or the midline is currently this tealish color
and then the lower band is green and the upper band is red. Now in my case, I'm happy with all of these settings, so I'm simply going to come over here and hit OK and OK one more time
Now applying the Bollinger Bands in a practical application, you'll find that there are a few different methods that we could use to actually find our trade signal
The first method we'll cover is using the bands to find areas where a stock may be overbought or oversold
Keeping in mind that the upper and lower band will encompass 95% of the trading volume
traders may look at a reversal from those levels. This is also known as a mean reversion
Looking here at our chart as an example, we can actually see here that the price of Intel has actually broken below our lower band
and this could indicate that the price has fallen too aggressively and may bounce back to its mean
However, rather than buying into the position immediately upon the crossover, we may decide to wait until the price closes back up above that lower band
This could act as a sort of confirmation so we don't actually get into the position too soon
Now on the other hand, we can also look here on our chart and find a point at which the price has crossed above the upper band
indicating that it might be overextended and we may see a pullback back to its mean
So looking here at the chart, we can actually see that point at which the stock price crossed above the upper band
and then it went back down below the upper band and closed below that level
That right there would be our sell indication. Now a lot of traders will also decide to exit that position when it actually reverts back to its mean or reverts back to that SMA line
Others may choose to actually hold onto it a bit longer and actually wait until it hits the other band
Now obviously that is entirely up to you how long you're willing to maintain that position
Now it's also important to note that many traders will also look at the overall slope of the Bollinger Bands in making their decision
If the bands are sloping up, the stock is likely in an uptrend, and if it's sloping down, the stock is likely in a downtrend
So we may decide to only look at entry points in an uptrend and ignore them in a downtrend
As for the second method, this is actually by taking advantage of a breakout after a squeeze
Now a squeeze would occur when the volatility falls below levels, being reflected in the narrowing of the Bollinger Bands
According to John Bollinger Band himself, the guy who actually created this indicator
this period of low volatility will often be followed by a period of high volatility
So basically a significant advance or decline in the price which we can hopefully take advantage of
Now a buy signal would be seen if the price crosses above the upper band after a recent squeeze
A sell signal would be the exact opposite, a stock price crossing below the lower band after a recent squeeze
So looking here at our chart, we can again see a time period at which these bands are actually contricting or squeezing
indicating that there could be a breakout in one direction or the other
Now in this case, we can see that the stock price actually ended up crossing above that upper band
indicating a breakout to the upside. So this crossover could have been our potential buy signal
But now that we have a general idea of how we can actually use these Bollinger Bands to find a buy or sell opportunity
let's next go over how we create a custom scan tab for the fine stocks that may meet this criteria right now
In order for us to do that, we'll simply come up here to the scan tab at the very top of the page
The next thing we're going to do is actually come over here and add a filter, and specifically a study filter
We can then see a brand new filter pops up, specifically called the ADX crossover
And what we're going to do is come over there and select that drop-down menu. We're then going to come down to the very bottom and select the custom filter option
This will then open up a pop-up window, which we can actually pull down and then begin creating our own custom scan
In our case, the very first thing we need to do is actually delete this preloaded filter in here
still for ADX crossover, let's go ahead and get rid of that. We're then going to come down to the add a condition button down in the lower left-hand corner
This window will now allow us to create our own custom conditions, and in my case, what I'm looking for is a recent Bollinger Band crossover
Specifically, I'm looking for stocks that were recently above the upper band, but in the last day have crossed back down below the band, indicating a potential sell signal
So in our case, the very first thing we're going to do is come up here to select a condition
It's going to be a pricing condition. We're then going to select the closing price
We're going to select a greater than. Then we're going to come over here and select a study condition, and specifically find the Bollinger Band indicator
Once we actually have that selected, the only thing we need to do is actually change this from the midline to the upper band
I'm then going to come down here and change the within bar to within two periods, which would be within two days
and now that I'm happy with that, I'm going to go ahead and hit the save button. Now we're not done yet. We actually have to add one more condition
so we're going to come over here to select another condition. We're going to come up and select another pricing condition
It's going to be based off the close once again. This time I'm looking for a recent cross below, so I'm going to change this to crosses below
We're going to come over here and select another study condition, and just like before, it's still going to be the Bollinger Band
We'll once again go ahead and change this from the midline to the upper band, and just make sure we have within one bar selected
Now that I'm happy with that, I'll simply come down here and select save and hit okay
Now of course I could come over here and hit scan, and I'm sure I would have quite a few results
Let's go ahead and narrow this down even further. Let me go ahead and say the company had to have traded at least a million shares so far today
and I'll also say the stock has to be worth at least, let's say, $10 a share
Coming up here and finding the word last, and we'll put $10 as the minimum
Now that I'm happy with that, we'll simply come down here and hit scan and see how many results we get
Looking down below, you can actually see there are only 12 results, and just to make sure this is actually working the way we want it to, let's go ahead and take a look at one of these guys
Looking here, we can see the top result is for Plan, P-L-A-N
so let's come over here to our chart page and throw that stock ticker in there
Looking here at our chart, if we zoom in a little bit, what we're looking for is the price to have recently been above the upper band
and then in the last day to have crossed back below it. In this case, Plan does meet our criteria, and specifically this would be a sell signal for us right here
Now if I wanted to double check that one more time, I could come back here to the scan tab
and let's take a look at the next guy here, B-K-I, go ahead and throw that in there
Once again, we'll come over here to the current time frame and go ahead and zoom in
and again you can see that the stock price has recently been above the upper band
and then within the last day it has crossed back below it, again giving us a sell signal
Now of course it's important to mention that the Bollinger Bands are not perfect
and you'll probably use this in concert with many other indicators to actually confirm a potential buy or sell
But I think this is a fairly comprehensive introduction to the Bollinger Bands and the ways you guys can use it in your trading
If you have any questions for me or recommendations for other studies you guys would like me to discuss
please leave them down below. But that wraps up today's video on the Bollinger Bands
I hope you all have an amazing rest of your week, and I'll catch you on the next one