The power of the candlestick pattern which is agreeable to the trend is important.
It is even more powerful if combined with other tools such as other indicators for confirmation. Using the SPY as a surrogate so we can calculate volume indicators, we find that both day Intraday Intensity and Accumulation Distribution are quite positive, suggesting that if a breakout were to occur here it would be to the upside. That stands in marked contrast to our more cautious approach to the market as a whole, so we will be monitoring this set-up quite carefully Bollinger On Bollinger Bands.
John Bollinger developed Bollinger Bands in the early s and since their introduction 30 years ago they have become one of the most widely used technical indicators worldwide. Learn how to use Bollinger Bands from the man who developed them. John Bollinger teaches you the basics of Bollinger Bands so you can use the effectively.
Today we will discuss one of the most robust trading indicators that has stood the test of time. This is the Bollinger Bands indicator. We will discuss the basic elements of this indicator, and I will introduce you to a few profitable Bollinger Band trading strategies. The Bollinger Band is best described as an on-chart volatility indicator. It consists of upper and lower bands which react to changes in volatility. The two bands wrap around the price action at the upper and the lower extremes.
When the volatility of a given currency pair is high, the distance between the two bands will increase. When the volatility of a given currency pair is low, the two bands begin to compress together.
The indicator includes a standard period Simple Moving Average which could be used to set entry and exit points of trades. As we noted, the Bollinger Bands trading tool consists of three lines — upper band, lower band, and a middle line.
The middle line is a period Simple Moving Average. It is calculated by summing the closing prices of the last 20 periods and then dividing the result by The upper line is calculated with a period SMA of the price action and its standard deviation.
The lower band is calculated the same way, using the period SMA and its standard deviation. The default standard deviation used is 2. Although it is a primarily a volatility indicator, the Bollinger Bands is quite useful in discovering support and resistance areas.
There are a few signals that can be generated using the Bollinger Band. These signals respond to different price attitudes on the chart.
When the Bollinger Bands are close to each other, then the trading indicator is conveying to us that the volatility of the Forex pair is relatively low. In this manner, the trading volumes are typically low as well, and the pair is said to be consolidating or ranging rather than trending.
In most cases, we should avoid trading within very tight price ranges, because they provide significantly less profitable opportunities than during trending phases. The image below shows a classical Bollinger Bands Squeeze. An important concept to understand in forex trading is that prices will typically move from periods of low volatility to periods of high volatility and back again.
As you see, after the squeeze, the prices breaks out to the downside, and enters a sustained downtrend. The Bollinger band squeeze breakout provides a good premise to enter the market when the price extends beyond one of the bands. This would provide for support in favor of the range bound market coming to an end and the likelihood of price entering into a new trend phase.
As a result, a bullish bounce could occur, creating a long trading opportunity. Think of this as a hidden support level based on an extreme volatility reading. However, if the price starts falling quickly at the lower band instead, and the distance between the two bands continues to increase, then we must be careful of entering a long trade.
When the bands are expanding and we see strong price momentum below the lower band, this is a clue that a bearish bias should still be in play.
The same scenario is in force but in the opposite direction. We look at the upper band as a hidden resistance level based on an extreme volatility reading. However, if the bands expand and the price starts closing candle after candle above the upper band, then we expect further bullish expansion. Use the pair to confirm signals given with other indicators. First, calculate a simple moving average. Next, calculate the standard deviation over the same number of periods as the simple moving average.
For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average. The Bollinger Band Width is the difference between the upper and the lower Bollinger Bands divided by the middle band. Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with.