When trading in the stock market, one needs to take care of a couple of things. Various indicators have been developed from time to time for making trading easy for the common men. Indicators like MACD, RSI, moving average, Bollinger Bands etc. Are the popular names.
Bollinger Bands developed by John Bollinger is a well tried and followed indicator by most traders. Bollinger Bands uses charts to show the ups and downs of the market. Basically, Bollinger Bands measure the market’s volatility.
When predicting the market with this indicators, one needs to take care of a few things such as-
- Upper Band i.e. Middle band + 2 standard deviations.
- Middle Band i.e. 20-period moving average
- And Lower Band i.e. Middle band – 2 standard deviations.
The middle band is basically a base for both the upper and lower.it is a 20-day simple moving average while the other bands are two Standard Deviations away from the centerline.
The difference between these three bands is nothing but the market volatility. The basic principle of Bollinger Bands is the measurement of this market volatility.
When the band widen it indicates that the market is heading towards a more volatile space or in simple words, the price movement of the share is huge and rapid. Again when the price moves very little, the band will narrow indicating that there is little volatility. However, sometimes strong trends can also ride these bands up or down.
- In order to strategize one’s trading, one needs to fix some basics of the indicator he or she is following. In this case, when using Bollinger Bands, it is important to identify when a currency pair reaches an overbought or an oversold condition. To make this identification simpler for the trader, according to Bollinger Bands indicator the Upper band is considered to be overbought and the Lower band is considered to be oversold.
- While eyeing the bulls or bear market, it is advisable to follow RSI along with Bollinger Bands as the movement of prices is the result of the battle between bears and bulls market. RSI complements the Bollinger Bands very well, especially during a Reversal Signal and a Continuation signal trend.
- In a long-term trend, the rules are simple when following Bollinger Bands. In case the previous close breaks above the upper band of the indicator then it is advisable to take a long position. Similarly, if the previous close drops below the bottom channel taking a short position is recommended.
- Keep an eye on the counter-trend trading indicator key point. The upper and lower bands do broadly match where the direction reverses. So a trader has to be careful while trading in such market.
- While following a channel of constrained volatility it is a common trend for the Bollinger bands to squeeze up. This is nothing but known as Bollinger Band Squeeze. This is in particular little tricky as buying and selling can be less profitable if not done cautiously. Thus when using Bollinger bands indicator, one must look out for Bollinger Squeeze.
Following these simple trading strategies can help one make good use of their money to gain maximum profit.