The technical study of the market is a clear-cut requisite for those who are looking to succeed and earn more. Out of the various ways that a trader can do so, there is hardly an indicator that is as efficient and effective as the one we’re going through in making an impact on buffing up your account.
Today, we dive deep into this marker and look closely at some of the ways in which one can benefit from incorporating this marker into their trades.
Bollinger Bands – What are they?
Named after John Bollinger, who is credited with the creation of this indicator to assess the ever-changing environment of the market, it is extensively utilized by market players. It allows one to figure out the market unpredictability and the relative highs and lows in it.
This indicator consists of a top and bottom band and a moving average (MA) line, which lets users plot trends. The chief aim of utilizing this indicator is to figure out whether the security is leaning heavily to either being bought too much or sold too much, thereby allowing one to distinguish the enter/exit positions.
It signals the ebb and flow of volatility and provides a clear-cut signal for trading, which makes life that much simpler for a trader. Nevertheless, users have to look into numerous other considerations when setting positions and this indicator.
When using this marker, traders realize that the price has a general tendency to come back to the middle of the bands. This is the main concept behind the ‘bounce.’ Shown below is a classic example of this.
The reason behind this is that the bands function as support and resistance levels. When the bands are stronger, the longer your time frame is. Various traders have benefited from this and come up with systems that take advantage of this bounce since such a strategy is ideal when there is no identifiable trend, and the market is ranging.
One thing to be highly cognizant of is that such an approach works well only when there is no price trend. So, one has to be aware of the width of the bands. Look for the conditions when the bands are either stable or contracting. A prudent trader would do well to avoid trading the ‘bounce’ whenever there is an expansion of said bands since this generally represents trending price, not ranging.
This doesn’t require much explanation. When the bands are squeezed tight, this generally showcases that a breakout is on the cards. The price move will rise if the candles begin to break out over the top band. Conversely, the move will go down if the candles begin to break out below the bottom band.
This is basically the working of a Bollinger squeeze. Such a strategy enables a trader to catch a move in its early stages. Even though such trends don’t appear every day, one can find them in a 15-minute chart a few times a week.
Before one can place limits, one has to know the setting up of the bands. They are at a considerable length from the MA – two deviations, to be exact. As such, they highlight the unpredictability of price in regard to the MA, which enables users to predict the movements that take place within them.
Users can place orders at the bottom of the range and sell orders at the top of the range for buying and selling respectively. Such a scheme works well with those currency pairs that move in a range, though a breakout can be quite costly.
Knowing the volatility
Since the bands betoken the degree of deviance from the MA, they alter in shape whenever there is a fluctuation. A higher unpredictability showcases that a new range is going to be set, which users can take advantage of using this indicator.
A price oscillation between the extremes makes it a perfect tool to estimate unpredictability. They will expand upon increasing unpredictability and contract when they fall. A range-bound scheme is best for high unpredictability, and a trend-based scheme works for low unpredictability.
Creating a backup
There are times when traders may end up missing capitalizing on the price movements at the two extremes, especially when the intensity is not that high in terms of their reactivity. That is why it is advisable to ascertain the entry/exit markers near the band lines to avoid feeling let down.
One scheme that has proven useful is to include another set of these bands. These are typically positioned only a single divergence from the MA. This will create two channels: one above, another below. With this setup, traders can place a buy order in the lower channel and a sell order in the upper zone. This definitely improves the likelihood of effective implementation.
There are some other high precision schemes in their implementation that allow traders to utilize these bands. These include, but are not limited to:
- The Pure Fade
- The Inside Day Bollinger Band Turn
Although utilizing them can be highly lucrative, a user has to comply with such methods to a T.
This indicator is perhaps the most expedient and effective one that users have utilized for ages now. Through it, users can easily gauge how volatile the movements are, which gives them enough information to know where and when to place entry/exit positions.
For purposes of trading, it works particularly well in determining such positions, as does the addition of an extra set of the bands. Users can benefit from utilizing this marker, for that is precisely what is required to earn more profits.