Bollinger bands Adjusting Your Shorts

You may be aware that some traders are very keen on Bollinger bands to help with spotting a shorting situation. Certainly you will want to see general weakness in other indicators, but one of the principles frequently observed with Bollinger bands is that when the price rises to the upper band, it will follow this by dropping to the lower band.  This technique with Bollinger bands has big potential if you use it correctly.

You may ask what about a breakout to the upside? The price is at liberty to do this and will on some occasions. The general rule of thumb with the Bollinger bands is that you look for the stock to touch the band if you want a shorting opportunity, but if the price pierces the band, that is a bullish sign. Some stocks are not so well behaved, however, as you’ll see if you look at this chart of Transocean, Inc.

Standard Bollinger bands are  most definitely pierced at the beginning of May, and again at the end of the month leading into June, but the next bars were lower, and did not act in a bullish manner. I hope you would not have gone long at these times, however, as you do not have other indications to support a bullish move.

On this particular chart, the RSI is plotted at the top, and reveals the stock to be rather overbought on those occasions. Other indicators may show you the same message.  The fact is that not all stocks act the way we think they should, and a wise trader observes what the market is doing rather than deciding what it should do, then being disappointed when it disobeys him.

Prices seldom go outside the boundaries when you plot Bollinger bands with the standard values. But if you have a volatile stock, they can exceed these standard settings, and you can certainly change the values that you use to better reflect the stocks activity.

While most technical analysis authorities will talk of the 2 standard deviation distance for Bollinger bands, the value is changeable for a reason, and you may want to use a setting such as 3 standard deviations on some stocks. The following chart has 2.5 and 3 standard deviations added – a total of 3 sets of Bollinger bands.

You can see that 3 standard deviations of Bollinger bands much more nearly contains the breakouts, and would defuse your alert condition. You should not obsess about finding an optimum settings for the numbers as this will only frustrate you, but you can, I would suggest, fine tune and find better ones in many cases.

Bollinger bands – How to use them

When it comes to effectively using Bollinger bands to identify and profit from low risk high odds trades you need to consider your process for selecting such candidates.   It’s important to use swing structure support and resistance with Bollinger bands to find the highest odds set-ups with the lowest risk – its also imperative that you combine odds and risk in your analysis.  It doesn’t matter how HIGH ODDS a trade is if the risk is too high. Likewise it doesn’t matter how low risk a trade is if the odds of it moving in your favor are at a minimum.

Bollinger bands – Risk vs. Odds

When I say high odds I mean this – “Chances are great this baby is going to move in my favor!”n  When I say low risk I mean literally your risk is LOW.  This simply means that your entry and stop are very close to one another.  Hence low risk.  Keep in mind however that low risk isn’t just a place you pick on the chart it is an integral part of the overall set-up.  In other words you’ll find things like support, a DOJI candlestick pattern that together allow you the completion of a Bollinger band set-up near your stop.  A situation where low risk is mitigated would be when a trigger candlestick within Bollinger bands is LARGE and fast moving and moves away from your stop to dramatically.   This is a classic newbie mistake trying to catch a fast moving train – it doesn’t work.

For now just remember that you must combine low risk and high odds together in every set-up.