Although Bollinger bands is one of the most used and reliable indicators to determine trends and breakouts. You should use it in combination with other indicators such as the Parabolic SAR which indicates price reversal and the Stochastics oscillator which indicates momentum. These other indicator will help you determine whether the signals provided by the Bollinger Bands are in fact good.
Bollinger Bands (BB)
As we discussed in previous posts, the BB is made out of 3 bands: the lower, the middle, and the upper BBs. The middle band is comprised of your commonly used 20-day Simple Moving Average. The “juice”, however, is in the upper and lower bands since they will indicate your trading signals. Depending on your setup, the BBs will show the price moving within a range, what is the range of the price 85-90% of the time.
By knowing the range within which the price is moving during a consolidation, you can buy or go long when the price hits the lower band and, conversely sell or go short when the price hits the upper band. Another signal for the BB is when the price breaks through the bands which usually indicate the beginning of a trend in the direction of the breakout.
The Bollinger Bands also help determine the volatility of the market. In a nutshell, a squeeze or narrow band width show a period of low volatility and usually indicates that a surge is impending and, therefore, a strong move in price is about to occur.
You should never use Bollinger bands alone to make your…