Posted by forex at 8:35 AM
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1. Insert the Bollinger bands indicator onto your stock, currency or commodity chart in your charting software. Most types of charting software contain the Bollinger bands indicator.
2. Identify a situation on your chart in which prices are moving within an approximate range without clear direction and in which the upper and lower bands are neither very wide nor very narrow in relation to the middle band. Prices in a range tend to oscillate up and down with no clear direction.
3. Identify a point at which prices reach either the upper or lower band when the market is in a range. This signals that prices may move back toward the area of the middle band -- a movement called the Bollinger bounce. Prices tend to revert back to the middle band when the market is in a range. For example, if prices increase to the top of the upper band, they may soon fall back to the middle band.
4. Watch for the upper and lower bands to contract close to the middle band when prices begin to hover around the middle band. This is called a Bollinger squeeze, in which price movement, or volatility, is limited to a small range. This signals a potential upcoming price breakout in which prices may move significantly in one direction.
5. Watch for prices to break out above the upper band or below the lower band and for the outer bands to start to widen away from the middle band after a Bollinger squeeze. This typically signals the beginning of a significant price movement in one direction. If prices break out above the upper band, prices may continue to rise. If prices break out below the lower band, prices may continue to fall.