Bollinger Bands is one indicator which many traders tend to have on
their charts even if they are actually analyzing other technical
analysis indicators and not really Bollinger bands.
Let's see how to use this common indicator to get us more winning
trades, mainly with a combination of other technical indicators like
stochastic oscillator.
Bollinger bands indicate the volatility of market and hence we should
always look for the change in volatility. The change always indicates
some major move and we need to catch that up early. So what 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 on the way. But
breakout in which direction?
1a) Widening Bollinger Bands (Bullish):
This pattern generally would take place after some band tightening with low volatility shorter candles with range movement)
- The bands are widening with the upper band moving sharply upside and the lower and moving sharply downwards.
- The price action is moving upwards.
- The recent candle sticks are longer than the previous candlesticks
Action:
- Check if RSI (Relative Strength Index) is in the range of 30 to 50 and rising.
- 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 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 wait for 2/3 candles may help in increasing the
gains.
If ADX does not move above 25 then the upward move may be limited and hence the profit taking will be limited
1a) Widening Bollinger Bands (Bearish):
This pattern generally would take place after some band tightening with low volatility shorter candles with range movement)
- The bands are widening with the upper band moving sharply upside and the lower and moving sharply downwards.
- The price action is moving downwards.
- The recent candle sticks are longer than the previous candlesticks.
Action:
- Check if RSI (Relative Strength Index) is in the range of 55 to 75 and falling.
- You may also 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.
- If all above are taking place then we can expect a further downward
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 wait for 2/3 candles may help in increasing the
gains.
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 also check if ADX is rising 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) which are longer than previous 2 to 3 candlesticks.
- Check if RSI (Relative Strength Index) is in 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.
- Check if RSI (Relative Strength Index) is in the range of 30 to 50 and rising.
- 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 confirm that
the recent move was just a correction and then take a buy position
3b) Continuation of downtrend after correction
During an ongoing downtrend the price may reverse to 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 below the signal (bearish configuration).
- With all above we can expect a continuation 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.
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