Advanced Bollinger bands

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Finding Trends with Bollinger Bands 

 

The original purpose of the Bollinger Band was to identify trending in open markets.  The Bollinger Band works tremendously well when fine tuned for the market climate. 

 

The two lines surrounding the simple moving average converge and diverge as volatility changes to make a trend around the current price.

 

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First step: Horizontal support and resistance

Bollinger bands and support and resistance


The first step to find trends would be to identify horizontal support and resistance lines.  These horizontal resistance lines will work just like the middle simple moving average band to support and resist the price action. 

 

Finding crucial horizontal support and resistance lines will help make sense of the seemingly irrational bounces inside the Bollinger Band trend.

 

Second Step: Angled Trendlines 

 

When the trend is already well defined, a trader should place angled trendlines above and below the trend for guidance. 

 

As angled trendlines do not work perfectly, adding them to the trend to supplement the Bollinger Bands is a good idea.  Often angled trendlines support or resist price action before the price touches the trend. 

 

Angled trendlines are not as precise as horizontal support and resistance, but will help you make sense of the changes in price in between the Bollinger bands. 

 

Angled trendlines can often interfere with the suggested trend based upon the Bollinger Band, and therefore, you should be careful to watch for any sudden changes in price.

 

Third Step:  Read the bands 

 

There are many different ways to decipher what the Bollinger Bands are telling you. 

 

·         Price swings tend to occur after the bands tighten due to lower volatility.  This is when the market is most likely to break out of the current formation.

·         A top forming outside or inside of the band followed by a bottom inside or outside of the band tends to mean a reversal of the trend.  The two bottoms or tops must both be made in or outside of the bands.

·         A bottom or top on one end of the band tends to trade to the other side of the band within a reasonable amount of time.  This usually begins with many different bars “sitting” on the outer bands of the Bollinger indicator.

 


The chart below shows the USDCHF pair rapidly moving between the top and bottom of the Bollinger Band lines with a 20,2 setting for N and K values respectively.

Trending Bollinger bands 

 

Using the Bollinger Band for trending

 

For application to find trends, the best recommendation is to follow the third bullet point above, watching for regular bounces inside the trend.  The general trend as plotted on the chart will be reinforced by the channel created by the trendlines. 

 

The trend created by the Bollinger Band will finish at the end of the last candle, whereas previously plotted trends will extend for however long they have been drawn on the chart.

 

Confirmation and testing 

 

The horizontal or angled lines will not change over time when plotted on the straight course, where the Bollinger Bands will change direction and width as the chart develops. 

 

Use your plotted trends for a generic view of future movements and incorporate the Bollinger Bands to find channels within the trend.  Bullet point two, which depends upon the top formation, will help you find the correct trend in a channel.