Bollinger Bands – An Indicator To Increase Your Profit Potential

Bollinger bands are one of the most effective technical indicators you can use and should be looked at by all traders.

Bollinger bands are simple to understand simple to apply and best of all they can really enhance your profit potential, so let’s look at them.

Bollinger bands will show you how to do the following.

Predict big trending moves

Spot trend reversals

Time trading positions with greater accuracy.

They are a visual indicator so you may like to check this out and look at some of the free chart services on the net so you can get a better all round view on the power of Bollinger bands and their potential.

What are Bollinger Bands?

Bollinger bands are volatility bands drawn around a simple moving average in the center giving you three lines to look at.

Bollinger bands are calculated using the standard deviation of price over the same period as moving averages and plotted as lines above and below the moving average.

Moving averages are used to identify the underlying trend.

Bollinger bands combine this moving average with the volatility of the individual market known as standard deviation of price to create a trading envelope.

The distance between upper and lower Bollinger bands shows the volatility of the market. The further away the upper and lower bands are the more volatile price is.

Why Bollinger Bands Work

In any market, the value of the instrument traded tends to rise slowly over the longer term. Prices may become volatile in the short term, but will normally come back to the longer term moving average (the center band)

The center band represents ”normal” value.

The volatility of the outer bands shows how volatile prices are and how far away price is from “normal” value.

Most volatile price movements are short term and are caused as much by trader psychology and the influence of greed and fear.

Trading with this in mind Bollinger bands are a very useful in the following scenarios.

1. Spotting New Trend Trends

When a market makes trades in a narrow range, the Bollinger bands be narrow and close to the central moving average this indicates a market with low volatility.

This can be a warning that a high volatility trending move is about to start. When prices break above or below the upper or lower band, a trend could be about to develop. Traders will then take a position in the direction of the trend.

2. Timing Entry Levels For Multiple Positions

We all hat missing the original trend however Bollinger bands can help you get in the trend with good risk to reward on a pullback.

Simply look for dips toward the center band and enter in the direction of the trend.

3. Market Turning points

When the price touch the top of the Bollinger band and stall a return to the middle band is likely and a sell is generated.

If the price touches the bottom of the Bollinger band and momentum does not follow through you do the reverse and buy.

Bollinger bands are a great indicator but like all technical indicators they don’t work all the time by themselves and you need to incorporate other indicators as filters.

To get a better picture and to weed out false signals use basic chart analysis with momentum indicators such as stochastics, RSI or ADX.

Bollinger bands are excellent as they reflect areas of value for timing trade entries and also warn of trending moves and are an indicator any trader should consider to help boost their profit potential.

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