Press Release Summary = Bollinger Bands are designed to capture the majority of price movement. When prices move beyond the upper or lower band, they are considered high (overbought) or low (oversold) on a relative basis.
Press Release Body = Contracting bands warn that the market is about to trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is often a false move, preceding a strong trend in the opposite direction.
A move that starts at one band normally carries through to the other, in a ranging market.
A move outside the band indicates that the trend is strong and likely to continue - unless price quickly reverses.
A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence (when the price is flat or rising or falling, but the MACD Histogram is going in the opposite direction...the price will break out in the direction of the MACD Histogram) or a Momentum Indicator to signal the end of a trend.
I use the BB\'s for indication of when a breakout or breakdown is imminent. When the outside bands get very narrow, it means the price is consolidating and is getting ready for a breakout, either up or down.
At this point, it\'s dangerous to have a position because you don\'t know if it\'s going to break up or down. When the bands get very narrow, it\'s almost better to close out your old positions, even at a loss, until you see a clear direction. If you don\'t want to close out an old position at a loss, at least hedge it.
The BB\'s can\'t tell you which direction the breakout will be, the MACD Histogram will do that, and I always trade in the direction theMACD Histogram is going.
Bollinger Bands are designed to capture the majority of price movement. When prices move beyond the upper or lower band, they are considered high (overbought) or low (oversold) on a relative basis.
A Super Advanced method of using BB\'s is to use two sets of BB\'s, both with the middle band set at 18. Set one BB to a standard deviation of 3 and leave the other standard deviation at 1. This gives you 6 short term support/resistance lines to work with. Your initial stop and target are the outer bands, and your inner bands are used for your trailing stop and short term resistance and support. You can also trade off the two inner bands.
This method is very similar to using Fibonacci OR Average True Range (ATR), but is much easier to use and understand.
About the Author Cynthia Macy has been trading various markets for over 12 years but now concentrates on the forex market and is the co-author of three forex trading courses. To learn more about forex trading, visit:
http://www.daytrade-forex.com
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2012
