Posted by forex at 2:41 AM
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1.
Create a chart with Bollinger Bands. Calculations can be made with a formula and plotted on a graph, but most charts today are computer generated. Settings can be adjusted on most platforms, but the typical default is a 20-day simple moving average for the mean price and two standard deviations for the upper and lower bands.
2. Buy support. The lower Bollinger Band often provides support, as shown by the green arrows, even within a downtrend. The bands will continue to decline, but price will often wait for them to “catch up” before resuming lower.
3. Sell resistance. The upper Bollinger Band is often strong resistance, as shown by the red arrows. Though price may eventually continue higher, reaching the upper band is usually a signal to traders that a stock has made a significant move and will probably consolidate or move lower before continuing the uptrend.
4. Play snapbacks. Though relatively uncommon, price will, from time to time, penetrate either the upper or lower band. When this happens, there is almost always a swift return to range within the bands, shown in the blue circle, usually within a matter of days. Many traders will use a decisive break out of the Bollinger Bands as a signal to buy or sell according to the direction of the break, in order to ride the “snapback” into the Bollinger Band range.
5. Use a Bollinger Band width display to gauge the overall volatility. The wider the band, the greater the volatility and therefore the higher the likelihood that changes in price will be dramatic. A narrow Bollinger Band indicates reflects the lower volatility of a trendless stock.
6.
Use multiple bands to create a trading envelope. When an additional pair of Bollinger Bands one standard deviation above and below the mean are added to the overlay, a “trigger” level is created. The blue circle in this chart shows price breaking above the lower band of the tighter overlay, triggering or confirming a buy. The rally that ensued found resistance at the upper band of the wider overlay, but the profit-taking sell signal did not occur until price fell back below the upper band of the tighter overlay, in the red circle.