Bollinger Bands is but one signal which numerous seasoned traders generally on their charts even when they're basically examining different technical analysis indicators and never really Bollinger bands.
We will observe the way you use this kind of frequent signal to obtain us more profitable investments, generally with a mixture of additional technical indicators such as stochastic oscillator.
Bollinger bands indicate the volatility of marketplace and hence we should always look for the change in volatility. The modification generally suggests some key move so we want to capture that upward early on. What exactly we need to look for is the following:
1) Bands are widening: Volatility is increasing and further move can be anticipated in the current direction. So we need to ensure that we are correct about the current direction.
2) Bands are tightening: Volatility is decreasing. It can be like silence before the storm and a major breakout may be along the way. However breakout by which direction?
1a) Increasing Bollinger Bands (Bullish):
This kind of pattern normally would occur after some band tightening with low volatility shorter candles with range movement)
- The bands are extending using the upper band moving dramatically upside along with the lower and heading dramatically down.
- The price action is moving upwards.
- The recent candle sticks are longer than the prior candlesticks
Motion:
- Check if RSI (Relative Strength Index) is in the range of 30 to 50 and rising.
- You might also check if ADX is rising in the direction of 25/beyond 25 in addition to +DI crossing -DI.
- Check if Slow Stochastic is crossing the signal line upwards (bullish).
- If all above are taking place then we can expect a further upward move of the price. It will be safer and hence better to wait for 2 or 3 more candles to confirm the trend and then take a buy position. It also happens that before a further upward move there may be some downward correction and the watch for 2/3 candles might help in improving the gains.
If ADX doesn't move over 25 then the upward move may be limited and hence the profit taking will be limited
1a) Widening Bollinger Bands (Bearish):
This particular pattern frequently might happen after a little band tightening together with low volatility shorter candles with range movement)
- The bands are widening with the upper band moving sharply upside and also the lower and moving greatly down.
- The price action is shifting down.
- The recent candle sticks are longer than the previous candlesticks.
Action:
- Check if RSI (Relative Strength Index) is incorporated in the range of 55 to 75 and falling.
- You can even check if ADX (Average directional Index)is rising towards 25/beyond 25 and -DI crossing +DI.
- Check if Slow Stochastic is crossing the signal line downwards.
- In the event that all over are taking place only then do we should expect a further down move of the price. It will be safer and hence better to wait for 2 or 3 more candles to confirm the trend and then take a sell position. It also happens that before a further downward move there may be some upward correction and the watch for 2/3 candles might help in enhancing the profits.
If ADX does not move above 25 then the downward move may be limited and hence the profit taking will be limited.
2a) Tightening Bollinger bands (bullish move):
The pattern happens with a prolonged sideways move with less volatility (short candlesticks)
- Check if there are minimum 2 continuous bullish candlesticks (green) which are longer than previous 2 to 3 candlesticks.
- Check if RSI (Relative Strength Index) is in the range of 30 to 50 and rising.
- You may even verify that ADX is increasing towards 25/beyond 25 and +DI crossing -DI.
- Check if Slow Stochastic is crossing the signal line upwards.
- If all above are taking place then we can expect an upward breakout. It will be safer and hence better to wait for 2 or 3 more candles for confirmation before taking a buy position with a red candle.
If ADX does not move above 25 then the upward move may be limited and hence the profit taking will be limited
2b) Tightening Bollinger bands (bearish move):
The pattern happens with a prolonged sideways move with less volatility (short candlesticks)
- Check if there are minimum 2 continuous bearish candlesticks (red) that are longer compared to prior 2 to 3 candlesticks.
- Verify that RSI (Relative Strength Index) is within the range of 40 to 60 and falling.
- You may also check if ADX is rising towards 25/beyond 25 and -DI crossing +DI.
- Check if Slow Stochastic is crossing the signal line downwards.
- If all above are taking place then we can expect a downward breakout. It will be safer and hence better to wait for 2 or 3 more candles for confirmation before taking a sell position with a red candle.
If ADX does not move above 25 then the upward move may be limited and hence the profit taking will be limited.
3a) Continuation of uptrend after correction
During an ongoing uptrend the price may reverse to the middle band or even the lower band.
- Verify that RSI (Relative Strength Index) is within the range of 30 to 50 and climbing.
- You may also check if ADX is above 25 and +DI over -DI.
- Check if Slow Stochastic is over the signal (bullish configuration).
- With all above we can expect a continuation of the uptrend. It will be safer and hence better to wait for 2 or 3 more candles to make sure that that the latest move was merely a correction and after that take a buy position
3b) Continuation of downtrend following correction
During an continuous downtrend the price might reverse towards the middle band or even the upper band.
- Check if RSI (Relative Strength Index) is in the range of 55 to 75 and falling.
- You may also check if ADX is above 25 and -DI above +DI.
- Check if Slow Stochastic is down below the signal (bearish settings).
- With all of above don't be surprised a extension of the downtrend. It will be safer and hence better to wait for 2 or 3 more candles to confirm that the recent move was just a correction and then take a sell position.
