Bollinger bands are an integral part of just about every charting system I have ever seen but many traders are unfamiliar with how to use them. In this lesson we will cover the basics of Bollinger bands and one particular technique which I have found to be very reliable.

Bollinger Band History

Bollinger Bands were invented by John Bollinger as a means of determining what could be considered as high or low around a give price.

The bands are plotted at a standard deviation (statistical term for measuring volatility) around a moving average. Typically the standard deviation used is 2.

The bands appear on charts as 3 bands.

A simple moving average in the middle. Most charting software defaults to a 20 period moving average.

An upper band calculated around a simple moving average plus 2 standard deviations.

A lower band calculated around a simple moving average minus 2 standard deviations. 
 

For our examples we will use the most common setting of a 20 period simple moving average. This will give us 3 bands, the middle band of a 20 period simple moving average and the upper and lower bands calculated around the middle band with standard deviation of 2. The closing price is most commonly used to calculate the moving average.
Bollinger bands can be used to generate buy and sell signals but that is not their primary use. The main purpose of the bands are to:

To identify areas of high and low volatility
To identify periods when prices are at an extreme and possibly ready for a reversal.
To identify a trending market.

See Chart Below

The squeeze (tightening) is a period of low volatility and often happens before a big move. It can also help identify potential breakout areas.

Reversal
In conjunction with other indicators you can identify potential reversal points.Trending Following
Although Bollinger bands will not tell you when the trend has started if you combine it with certain indicators they will confirm the trend. It is also easily identifiable visually.My Use Of Bollinger Bands

As I mentioned earlier Bollinger bands are not really meant to be used as a signal generating indicator but in conjunction with another indictors can be very useful.

I like to use Bollinger bands and RSI together to generate possible buy and sell signals or to confirm overbought or oversold areas.
I normally set the RSI at 14 and when it reads over 70 and price is at or pushing through the upper band then I know we are overbought and ready for a reversal. I will either start thinking about shorting the market or if I am already in a long position will start to cover.

When the RSI reads below 30 and price is touching or pushing through the lower band then I know we are oversold and I will either consider buying the market or close existing short positions.

See Chart

Experiment with the settings until you find the right parameters for the market you are trading. I have found the bands to be effective on all time frames from 5 minutes to monthly bars.

Good Trading

Best Regards
Mark McRae

www.traderssecretcode.com

 

We are going to use some basic indicators in a different way to try and get a precise entry into a trade.

What we are going to show here is the use of Envelopes, which form trading bands. The particular trading bands we are going to use will be based on exponential moving averages. This will help us form a method to trade. This is basically an intraday strategy, which works well on the 10min/15min time frame.

Envelopes are used to indicate the trading range of a given market above and below an average price. Basically, moving average envelopes or trading bands are calculated by taking a moving average and calculating upper and lower trading bands as a fixed percentage above and below the moving average respectively.

These are considered to suggest extreme overbought or oversold conditions. The assumption is that, price should not deviate from the average of the underlying price element (high or low) by the percentage utilized.

They differ from Bollinger bands, since Bollinger Bands place boundary lines based on standard deviation, whereas envelopes place lines at fixed percentage points above and below a moving average line. The upper and lower limits specify entry and exit points for traders.

But, instead of using them to indicate overbought or oversold conditions, we will attempt to create a narrow trading range and base the rules for this method on this narrow band. We will keep our settings for the Trading Bands as (40, 0.30)

This means you have a band of two moving averages of 40, with a fixed percentage of 0.30 above and below. We then use another Exponential moving average with a setting of 15. The additional moving average is to help identify when the market is beginning to trend.

The first rule is - do not enter a trade when the price is within the band. A trade is signaled only when the price moves outside the band. The general policy is to go long when the price is above the band, and to go short when the price is below the band.

The second rule is for confirmation - don't trade when the 15 exponential moving average is flat. Only trade when the 15 exponential moving average starts rising or falling in the direction of the trade.

This method keeps you out of the market when there is consolidation, which means more chances of getting whipsawed.

The chart below, clearly shows that price was within the band for the first part of the chart and entering a trade here would have got you whipsawed. As a matter of fact, the EUR/USD was in a major uptrend on the daily charts at this time and this method gave us a precise point to enter the trade on a lower time frame.

Chart Points

 

 

The red line is where the market was in consolidation. The market then began to rise slightly and the 15 exponential moving average also began to rise - this is the set up.

Even though the market was set up for a trade, the safe play was to wait for 15 exponential moving average to start to trend and for the price to be well above the bands.

The market then pulled back forming resistance. This resistance area is what we are looking for. A break of the resistance is the final confirmation that we have a high probability trade.

The entry is made on a breach of the previous resistance with an initial stop just below the support area that formed.
 

 

Suniiel A Mangwani

Good Trading

Best Regards
Mark McRae
 

Being A Technical Analyst

One of the main ways traders approach the market is that of technical analysis. A technical analyst doesn't look at income statements, balance sheets, company policies, or anything fundamental about the company. The technician looks at the actual history of trading and price of a security or index. This is usually done in the form of a chart. The security can be a stock, future, index, currency or a sector. It is flexible enough to work on anything that is traded in the financial markets.
The technical analyst believes that the market price reflects all known information about the individual security. It includes all public and insider information and reflects all the different investor opinions regarding that security.

Just as fundamental analysis looks at the past to help make a decision, technical analysis also incorporates the past to aid in the decision making process. However, the technical analyst believes that securities move in trends and these trends continue until something happens to change that trend. With trends, patterns and levels are detectable.

The tools of the technical analyst are indicators, patterns and systems. These tools are applied to charts. Moving averages, support and resistance lines, envelopes, Bollinger bands and momentum are all examples of indicators.

These indicators help tell a story and just as a doctor looks at x-rays to help him make a decision, an analyst looks at charts to help him make a decision.

Many people believe that to buy and hold is the right strategy for owning securities and this is fine in some circumstances. It can also be beneficial to buy and sell the same security many times in a given period.
 

ABC.inc might be a company you want to own for the long term and that's fine. However, there's nothing wrong with buying at 50, selling at 67 and buying it back at 55. There's also nothing wrong with buying at 50, selling at 67, shorting the security at about 67 then closing your short at 55 and buying it back. In the previous example you have made your money work a little more efficiently. In the case of buying and holding you only make money when the security goes up. Why not make money when the security goes up, comes down, and goes back up again. This way, your money has worked harder for you. Technical analysis can help in predicting turning points and direction in prices.

Before applying technical analysis make sure you thoroughly understand the principals that you are applying. Read as much as you can and find a few forms of technical analysis that you feel comfortable with. Remember you only need to find one thing that works in order to make money.

Good Trading

Article by
Mark McRae
http://www.traderssecretcode.com