Improve Your Trading with Bollinger Bands

Technical traders make trading decisions based on their price charts. Each technical trader is a bit different, but the strategies they use can be grouped into a few broad categories.

Indicator-based trading is relying on indicators to analyze the price and provide trade signals. Many indicators provide a specific trade signal which alerts the trade that now is the time to take a trade.

Bollinger Bands are a technical indicator developed by John Bollinger. The indicator forms a channel around the price movements of an asset. The channels are based on standard deviations and a moving average. Bollinger bands can help you establish a trend's direction, spot potential reversals and monitor volatility. All of this can help you make better trading decisions.

Day Trading Uptrends with Bollinger Bands:

Bollinger bands help assess how strongly an asset is rising (uptrend), and when the asset is potentially losing strength or reversing. 

Here are three guidelines for using Bollinger Bands in an uptrend.

• When the price is in a strong uptrend it will typically touch or run along the upper band during impulse waves higher. When it fails to do that it shows the uptrend may be losing momentum.
• Even during an uptrend prices drop for periods of time, known as pullbacks. During an uptrend, if the price is moving strongly then pullback lows will typically occur near or above the moving average (middle) line. The pullback doesn't have to stall out near the middle line, but it does show strength if it does.
• When the price is in a strong uptrend it shouldn't touch the lower band. If it does that's a warning sign of a reversal.

Day Trading Downtrends with Bollinger Bands:

Bollinger bands help assess how strongly an asset is falling (downtrend), and when the asset is potentially strengthening (to the upside) or reversing.

These three guidelines, similar to uptrend guidelines, can help use Bollinger Bands in a downtrend.

• When the price is in a strong downtrend it will typically touch or run along the lower band during impulse waves lower. When it fails to do that it shows the downtrend may be losing momentum.
• Even during a downtrend, prices may rally for periods of time, called pullbacks. During a downtrend, if the price is moving strongly lower then pullback highs will typically occur near or below the moving average (middle) line. The pullback doesn't have to stall out near the middle line, but it does show selling strength if it does.
• When the price is in a strong downtrend it shouldn't touch the upper band. If it does that's a warning sign of a reversal.

Bollinger Bands can be combined with a trading strategy, though, such as the day trading stocks in two hours method.

The guidelines above are not a trading strategy on their own. A trading strategy requires entry points, exit points, and risk management, which we Provide to our clients. Know More.