Trading Trends With Bollinger Bands
Bollinger bands are used to measure the volatility in the market in terms of the standard deviation from the 20 period moving average of price action. The default settings are 2 standard deviations. Bollinger Bands (BBs) are used to trade ranges but do you know this fact that we can use BBs for trading trends more effectively. Let's see how!
Now, if we superimpose a second set of BBs with standard settings of 1 standard deviation on to a price chart that already has a BB with the default settings of 2, you will be surprised to find out as the price action tends to start trending in the market, it will be contained in the 1SD-2SD BBs.
These four bands form three dynamic zones on the charts. One is the buy zone that is formed between the upper 1 SD and 2 SD BBs. The other is the sell zone that is formed between the lower 1 SD and the 2 SD Bollinger bands. The zone between the 2 upper SD and the 2 lower SD Bollinger Band is a sort of no man's land where price action is directionless.
So when the price action is between the buy zone, it is in an uptrend. When the price action is between the sell zone, it is in a downtrend. When it is in the no man's land, it is essentially directionless.
Here are the rules for making a long entry. Price action must enter the BB buy zone. The price should close within the buy zone to enter into a long trade. Enter into a long trade at the close of the entry bar. Place the stop loss at the bottom of the entry bar. It the trade moves in the right direction, exit only when prices close below the buy zone.
Similarly, the rules for making a short trade are: price action must enter the BB sell zone. The price should close within the sell zone for you to enter into a short trade. Enter into a short trade at the bottom of the entry bar. Place the stop loss at the top of the entry bar. If the trade moves in the right direction, exit only when price action closes above the sell zone.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Get these 3 Swing Trading Systems FREE. Master these highly profitable Candlestick Patterns with this FREE 82 page PDF Candlestick Guide.
by: Ahmad Hassam
Total views: 27
Word Count: 378
Date: Thu, 27 Jan 2011
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