The Secret Mindset
Learn about 10 important trading rules and strategies for using Bollinger Bands, a versatile indicator that can help find price patterns, read trend strength, and determine entry and exit signals. Bollinger Bands can help identify overbought or oversold market conditions during trends, find dynamic support and resistance areas, and provide confirmation of volatility. By applying Bollinger Bands on other indicators and in combination with leading indicators like pivot points, volume, or Fibonacci retracements, traders can get a better read on the market and enhance the accuracy of their trades by paying attention to candlestick patterns that touch the upper and lower bands.
The Top 10 Bollinger Band Trading Rules You Need to Know
Introduction:
Bollinger Bands is one of the most versatile indicators that can be used in various market conditions. In today’s article, we’ll discuss the most important 10 trading rules and strategies you need to know about the Bollinger Bands.
1. Buy at the lower Bollinger Band in uptrends and sell at the upper BB in downtrends:
Identify overbought or oversold market conditions during trends. Look at the overall direction of price and then only take trade signals that align with the trend. When the price of the asset is in an uptrend and breaks below the lower Bollinger Band, prices have perhaps corrected too much and are due to bounce. When the price reaches the lower Bollinger Band in an uptrend, you have a potential buy trade. On the other hand, when price is in a downtrend and breaks above the upper band or touches the band, the market is perhaps overbought and due for a pullback.
2. Use Bollinger Bands for finding dynamic support & resistance areas:
The Bollinger bands move as the price moves, offering dynamic support and resistance. In combination with classic support and resistance areas, the Bollinger bands signals are even more reliable.
3. When Bollinger Bands are parallel, price is unlikely to stay outside the bands:
After the price experiences a large up or down movement, it will often consolidate or trade in a channel. From our experience, after a steep upward or downward movement in price, the Bollinger Bands will flatten, and then there is a high probability that at least several back and forth movements between the upper and lower bands will occur. When bands are parallel, there is a higher chance that price will stay within the bands instead of breaking and staying outside of them.
4. Add Bollinger Bandwidth indicator to confirm volatility:
The Bollinger Bandwidth indicator measures the percentage difference between the upper and lower Bollinger Bands. The Bandwidth indicator provides a better visual of price consolidation (low bandwidth values) and periods of volatility (high bandwidth values). When the distance between the two bands is relatively narrow that could be a sign that a market may be about to initiate a pronounced move in either direction.
5. Search the Bollinger Bands squeeze pattern and wait for the imminent breakout:
When markets become too slow, the upper and lower bands become close to each other. This is called a squeeze. An extreme contraction of the bands or a sharp narrowing of the bands implies that volatility is simply too low, at least from a historical perspective, and we could expect a significant advance or decline in the immediate future. When the bands squeeze together, it usually means that a breakout is getting ready to happen.
6. Apply Bollinger Bands on other indicators:
Traders often apply the Bands on the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic indicators. This helps in catching price swings where corrections or pullbacks may start.
7. Use Bollinger Bands in combination with leading indicators:
Leading indicators anticipate price movements ahead of time. They attempt to predict where the price is heading. Such indicators include pivot points, volume, or Fibonacci retracements. When the Bollinger bands squeeze pattern occurs, observing these leading indicators may be helpful, especially when you spot reversal patterns.
8. Pay attention to candlestick patterns that touch the upper and lower bands:
Observing the candlestick patterns may be helpful, especially when you spot reversal patterns. The hammer, morning star, and engulfing setup are some important patterns.
9. Use Bollinger Bands to identify trends:
The Bollinger Bands can help to identify the trend by using the middle band as a moving average. When the price is above the middle band, the trend is considered bullish, and when it’s below, the trend is considered bearish.
10. Use Bollinger Bands to exit trades:
When price touches the upper or lower bands and the RSI or MACD provide a divergence signal, it’s time to exit the trade.
Conclusion:
Bollinger Bands is a versatile indicator that can be used in various market conditions. In this article, we provided the most important 10 trading rules and strategies you need to know about Bollinger Bands. By applying these rules and strategies, traders can improve their trading skills and make better-informed decisions.
