TOP 5 Bollinger Bands SECRETS (MUST SEE!)

in this video i'm going to show the top 5 bollinger bands secrets that i learned after many years of studying the financial markets like i said in the video about moving average secrets you'll find many people who will charge you for this level of information but i believe this to be basic enough to be given away for free if you haven't watched the video about moving average secrets i encourage you to do so because bollinger bands are an indicator that builds on top of moving averages so it's a good idea to have a good grasp

on the fundamental properties of moving averages first that said let's move on to the first bollinger band secret secret number one the meaning of bollinger bands many traders have the habit of plotting indicators and lines on a chart without really understanding the origin of such lines and their meaning that's certainly the case with bollinger bands the bollinger bands indicator is composed of three lines the center line is a moving average and the two outer lines are moving standard deviations of price in finance standard deviation is a measure of volatility in other words bollinger bands indicator

attempts to model the volatility of price given a certain number of pass periods with that said we have to understand the meaning of standard deviation since it's the query component of the bollinger bands indicator as the name suggests the standard deviation measures how much the data points stretch away from the mean of data points in this illustration we have two examples that indicate the standard deviation when data points don't stretch too much away from the mean we have low standard deviation when the data points do stretch away more abruptly we have higher standard deviation just

for curiosity below we have the formula for the standard deviation we are not going into detail on that in this video since we are only interested in the rough intuition about standard deviation for now by looking at these two situations we can sort of understand why the bollinger bands is a volatility indicator when prices come and not deviating too much from its mean the bollinger bands will be narrow when price is volatile and showing a lot of powerful movements the bollinger bands will expand the bottom line about standard deviation in the paradigm of bollinger bands

is that narrow bands mean low volatility and wide bands mean high volatility one paramount detail here that you must never forget is that since bollinger bands are built on moving averages and moving standard deviations they have lag that means that if the bull orange bands are displaying high volatility at the moment with wide bands that might not necessarily reflect the current moment since it's an average of past periods this is the old problem of lag we talked about in the video about moving averages in this chart we can see a good example of how narrow

and wide bands reflect the market volatility on the left the narrow bands reflected a rather calm market after a while price exploded to the upside and that made the bollinger bands expand also notice that there is some lag in the way they expand since bollinger bands are built using moving averages and moving standard deviations secret number two the empirical rule in statistics the next secret i want to show you is related to something called the empirical rule in statistics you probably already noticed that the standard setting for bollinger bands is two standard deviations from the

mean that's actually one of the very few places in tactical analysis where numbers are now randomly or arbitrarily chosen in this case the motivation for using two standard deviations from the main is the empirical rule in statistics the empirical rule states that assuming we are talking about normally distributed data 68 of the data will fall within one standard deviation from the mean 95 percent of the data will fall within two standard deviations from the mean and 99.7 percent of the data will fall within three standard deviations from the mean the fact that bollinger bands have

a default setting of two standard deviations from the mean is because the indicator was built to show movements where price stretches too much away from the main with a certain degree of frequency it's much easier to understand what all of that means by using a chart example in this first chart i plotted a bollinger bands indicator but i altered the number of standard deviations to one according to the empirical rule when we use one standard deviation from the main only 68 percent of price will fall within the bollinger bands just by looking at the chart

we can more or less observe that this makes sense roughly 68 percent of price is captured inside the bollinger bands in the second chart i altered the number of standard deviations to two this is the default setting of the bollinger bands indicator and according to the empirical rule 95 percent of price falls within the bollinger bands we can see that this is more or less correct because most of price action is captured inside the bollinger bands are only a few places where price goes out the limits provided by the two moving standard deviations in the

third chart i alter the number of standard deviations to three notice that now there are even less places where price goes outside the boundaries established by the moving standard deviations this of course agrees with the empirical rule which states that 99.7 percent of data will fall within the three standard deviations from the mean the use of this is pretty intuitive when price goes outside the boundaries provided by the moving standard deviations it means that it's too stretched away and it will tend to reverse the additional detail that not all traders know is that it's one

thing when price goes out the two standard deviation barrier and it's another when price goes out the three standard deviations barrier according to the empirical rule price going out three standard deviations from the mean is a much stronger and rarer event you tend to notice that most of the times that price goes out the three standard deviation barrier it will reverse at least a little bit when two standard deviations are used you observe that price will continue going outside the boundaries in many cases this leads us directly to the third secret about bollinger bands secret

number three the reversibility property what we learned in the second secret about bollinger bands regarding the empirical rule in statistics gives rise to the third secret we're going to talk about which is the behavior of price in relation to the moving standard deviations we already talked about the rough intuition of what standard deviation means the reversibility of price is how likely price is to reverse at a certain point in the chart for example when price surpasses the upper or lower bollinger band it has a chance of reversing back to the mean because it is too

stretched away from the mean like we observed in secret number two the higher the number of standard deviations the less likely it is that price goes outside the bollinger bands in the particular case of the bollinger bands there are optimal numbers for the standard deviation if the trader uses two standard deviations from the main price will often go outside the boundaries if the trader uses three standard deviations from the mean the number of times the price go out of the bollinger bands will be reduced however when price does go out the bollinger bands it will

have a bigger chance of reversing at that point in this chart we can see an example of this reversibility property i'm talking about i plotted two bollinger bands on top of each other one of them has two standard deviations from the main and the other has three standard deviations from the mean the orange channels show the space in between the second and third standard deviations in the first arrow marked in the chart we can see that price goes outside the boundaries represented by the bollinger bands with two standard deviations from the mean notice that price

doesn't reverse immediately in the second red arrow we see price going outside the boundaries established by the bollinger bands with three standard deviations from the mean once price closes beyond that level it immediately reverses back to the mean it's important that you understand that this doesn't always happen on the right side of the chart we can see another example price does break out the two standard deviations barrier but it's not until it breaks the three standard deviation barrier that it starts to reverse back to the mean as it is shown by the green arrow the

takeaway from this third secret about bollinger bands is that the higher the number of standard deviations price breaks out of the more likely it is that it will reverse back to the mean even though that makes sense statistically speaking there are more pernicious problems that get in the way of this property of price one of these detrimental problems is related to the fact that price charts are non-stationary which is the subject of the next secret about bollinger bands secret number four the problem of mean reversion in non-stationary time series the first strategy that comes to

mind when we think about bollinger bands is assuming that price will reverse direction when it surpasses one of the outer bands and will reverse back to the center moving average as we saw in the third secret the bigger the number of standard deviations price stretches away from the main the more likely it is that it will immediately reverse back to the mean this is known as a mean reverting strategy however there is a fundamental problem when we try to apply this strategy in price charts price charts have the property of being non-stationary which means that

they have variable mean and variable standard deviation another way of looking at this is that price charts have trends that change continuously by definition mean reverting strategies only work well on time series that are stationary meaning those who have constant mean and constant standard deviation a stationary time series looks like a sideways market and any mean reverting strategy only works in such a scenario because the series continues to be stationary in any price chart the market alternates between sideways movement and trending movement in a rather unpredictable way so using a mean reverting strategy is a

bad idea in this chart we can see that price was in stationary mode inside the green box meaning that it was a sideways market notice how the mean reverting strategy would work perfectly well in this case because we have a flat mean and a flat standard deviation in the second chart we can spot the problem of mean reverting strategies in non-stationary markets the first green box we can see that price escapes the boundaries outlined by the bollinger bands so the trader could think it would be a good idea to buy the market with the hope

that it reverses back to the mean here's the critical point about this price will always reverse back to the mean but the problem is that in non-stationary or trending markets the mean will also move so by the time price reaches the mean again it will be in a different position and a loss will occur in the second green box we can see that price indeed reversed back to the mean but since it takes time for price to do that and the mean was going down due to the fact that the market was trading down by

the time price reached the mean it would generate a loss instead of a profit very much like the problem of finding the optimal moving average periods for a crossover strategy the trader can never truly know when the market will shift between sideways and trending modes to make a simple analogy trading a mean reverting strategy in a non-stationary price chart is like trying to score a goal with moving goal posts by the time the ball reaches the goal the goal posts will be in a different position and you'll miss the goal completely secret number five bollinger

bands as dynamic support and resistance another use of the bollinger bands is as dynamic support and resistance very much like in the way that was demonstrated in the videos about moving average secrets the outer lines in the center line of the bollinger bands indicator can all act as dynamic support and resistance this already opens up several possibilities because there are three powerful settings that can be used and that i agree with the empirical rule we talked about previously the settings are of course one two and three standard deviations one important detail is the angle of

the moving standard deviations when the moving standard deviations are going against price they tend to provide stronger barriers when they are going in the same direction as price they tend to represent weaker barriers the flat angle in the moving standard deviation works in a less intuitive way because a flat angle will usually mean a sideways market so the barrier will be strong even though the angle isn't steep all of these details regarding the moving standard deviation angle are just guidelines of course it doesn't always work that way this chart we can see how the moving

standard deviations can work as barriers for price as it is highlighted in the red circles an additional trick we can use in certain situations is visualizing the bulge events from other time frames to see if there are any barriers for price this chart i plotted two bollinger bands the red one is from the native one hour chart and the black one is from the four hour chart in the green boxes we can see movements where price was interacting with the moving standard deviations from both the one hour chart and the four hour chart there will

be additional strength to the idea of treating bollinger bands as dynamic support and resistance lines however before you attempt to transform this into a strategy keep in mind that it's not so simple as observing where the lines correlate there are many more aspects you would need to consider in order to transform this into a strategy but this is a subject for another video i hope you learned something new and useful with this video if you want to learn how to trade with professional techniques please check out the video courses i provide for beginner to intermediate

traders i offer the fractal flow series which is composed by the fractal flow strategy the market maker strategy and the newtonian trading strategy each one of these will teach you a different approach to trading each of these strategies work on their own but they can be combined together also they work on any market and in any time frame that you wish to trade for intermediate to advanced traders i after the price action series which is composed by heavyweight techniques involving factor geometry linear algebra a very refined contextual market reading to find the most accurate trade

entries and exits that are possible to find on a price chart you can visit my website fractalflowpro.com to see more details about the table of contents of each course in the testimonials from students if you wish to support the channel please click the like button subscribe to the channel activate the notifications button share the video and leave your feedback below in the comment section don't forget also to check the other videos in the channel thank you very much for watching and i hope to see you in the next videos take care you