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25. How to Trade Bollinger Bands - Stocks, Futures, Forex
http://www.informedtrades.com/
A Lesson on Bollinger Bands for active traders and investors using technical analysis in the forex, futures, and stock markets.
The link that I refer to on Standard Deviation is here: http://en.wikipedia.org/wiki/Standard_deviation
The link that I refer to with more resources on Bollinger Bands is here:
http://www.informedtrades.com/tags/index.php/bollinger%20bands/
In our last lesson we learned about the Stochastic Oscillator and how traders use this in their trading. In today’s lesson we are going to learn about an indicator which helps traders gauge the volatility and how current prices compare to past prices.
Bollinger Bands are comprised of three bands which are referred to as the upper band, the lower band, and the center band. The middle band is a simple moving average which is normally set at 20 periods, and the upper band and lower band represent chart points that are two standard deviations away from that moving average.
Example of Bollinger Bands:
Bollinger bands are designed to give traders a feel for what the volatility is in the market and how high or low prices are relative to the recent past. The basic premise of Bollinger bands is that price should normally fall within two standard deviations (represented by the upper and lower band) of the mean which is the center line moving average. If you are unfamiliar with what a standard deviation is you can read about it here http://en.wikipedia.org/wiki/Standard_deviation. As this is the case trend reversals often occur near the upper and lower bands. As the center line is a moving average which represents the trend in the market, it will also frequently act as support or resistance.
The first way that traders use the indicator is to identify potential overbought and oversold places in the market. Although some traders will take a close outside the upper or lower bands as buy and sell signals, John Bollinger who developed the indicator recommends that this method should only be traded with the confirmation of other indicators. Outside of the fact that most traders would recommend confirming signals with more than one method, with Bollinger bands prices which stay outside or remain close to the upper or lower band can indicate a strong trend, a situation that you do not want to be trading reversals in. For this reason selling at the upper band and buying at the lower is a technique that is best served in range bound markets.
Example of Buying and Selling at the Upper and Lower Band:
Large breakouts often occur after periods of low volatility when the bands contract. As this is the case traders will often position for a trend trade on a break of the upper or lower Bollinger band after a period of contraction or low volatility. Be careful when using this strategy as the first move is often a fake out.
Example
As Bollinger bands paint a good picture directly on the price chart of how high or low price is relative to historical prices, this is a good indicator to use in conjunction with other methods such as some of the chart patterns that we have learned so far and some of the candlestick patterns which we will learn in future lessons. Below is one such example:
As Bollinger Bands are one of the most popular indicators around I have created a special page on InformedTrades.com which lists multiple resources for those looking for more information on trading Bollinger Bands.
That’s our lesson for today. You should now have a good understanding of Bollinger bands and how traders use these in their trading. In our next lesson we are going to go over the Average Directional Index or ADX, which helps traders identify the strength or weakness of a trend so we hope to see you in that lesson.
As always if you have any questions or comments please feel free to have them in the comments section below, and have a great day!
Duration : 0:7:36
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hey david vivo en …
hey david vivo en medellin y estoy metido en toda esta ciencia del forex y stocks me gustaria intercambiar ideas contigo
Hi Purplerenizz, …
Hi Purplerenizz, Thanks for the comment. If you visit my channel by clicking the InformedTrades link in the upper right hand corner of this page you and then go to videos numbered 21, 22, and 23 those are the main momentum indicators. Best Regards, Dave
Hi David, can you …
Hi David, can you tell us something more about Momentum indicator? Thanks again.
Hi Purplerenizz, …
Hi Purplerenizz, Thanks for the compliment am glad you like the videos and really appreciate you passing them around. I also upload to google video which allows you to download a little easier than youtube. Keepvid (thats the website youtube won’t let you use the dot com part) which I have not tried myself but may be an easier option as well. Lastly we are going to be putting together DVD’s soon so I will come back to you when those are ready as well. Best Regards, Dave
Hi David,you are a …
Hi David,you are a King.
I have downloaded all videos from youtube and will be giving them to people that are new to forex, just i wanted to ask you, The videos that are on your website can I download tham all in once maybe? Or not!, because i have spent 5 hours decoding 50 videos from youtube. Thanks again friend, Rock on.
Hola David, Glad …
Hola David, Glad to hear from you and good luck with your studies on the markets. Let me know if there is anything that I can do to help. Best Regards, Dave
Thank you Mister …
Thank you Mister David for those helpful videos, I am witring from COlombia, I love Capital markets specially stock market and I am just getting used to know all about it be sure I ‘ll watch all your videos
Thanks for the …
Thanks for the comment I am glad you like the videos. I agree here and feel that even if a trader doesn’t use technicals they should at least have an understanding of them so they know what they are not using. Best Regards, Dave
I agree with the …
I agree with the mix idea. I started out years ago as a fundamental trader and made good trades but missed a lot because that didn’t match a criteria. Few years later I learned TA and did well with it but found I got whipsawed about more than I’d like to admit.
I now implement both and find that my bottom line is much better than just doing one or the other. But this is just one traders story.
Great Videos btw, would have saved me some headaches back in the day
Hehe.
Hehe.
No, you’re not …
No, you’re not misunderstanding.
But like not knowing if and when a stock will go up, we don’t know if and when it will go down either.
I’m just playing devil’s advocate.
I have never seen …
I have never seen stats on this however I personally believe that you can make money being a technician, a fundamentalist, or a mix of both and that its best to find what works for you and go with that. I of course could be wrong as well though;-)
Thanks again for …
Thanks again for the comments. I don’t see how the stock market going up or down has anything to do with the odds of making money since you can go short when the market goes down. Or maybe I am misunderstanding what you are saying? Best Regards, Dave
True, I’m aware of …
True, I’m aware of these exceptions. But I feel secure venturing that historically, fundamentalists have trounced technicians.
Of course, I could be wrong.
Actually, the same …
Actually, the same can be said of stock market investing overall.
There are no natural laws that say a stock must go up. However, we continue doing thing.
Hehe.
the difference …
the difference between trading and going to a casino is that when gambling at a casino the odds are always against you and in the houses favor so over the long term there is no way to win besides cheating. Best Regards, Dave
The difference …
The difference between trading and going to a casino is that the odds are always against you when going to a casino so over the long term there is no way to win.
The difference …
The difference between trading and going to a casino is that when you go to a casino the odds are always against you and in the house’s favor. Best Regards, Dave
While I agree that …
While I agree that Warren Buffet would agree that investing for the long term is the way to go, I think you will find if you look at the Forbes 400 list that there are a lot of billionaire traders listed on there including George Soros, Stevie Cohen, James Simons, Bruce Covner and others.
Isn’t trading just …
Isn’t trading just a game? Like going to a casino?
I mean, over the long term which creates more wealth: fundamental analysis or technical analysis? Definitely, the former.
How many billionaire traders are there out there?
Warren Buffet would agree.
glad you liked it …
glad you liked it thanks again for the comment. I think getting an idea of the overall direction of the market on longer term charts and then moving down to shorter term charts to pick trades is a good overall strategy. For currencies specifically I would add a 4 or 8 hour chart in there as it gives a better picture of what is happening during each of the trading sessions which make up the 24 hour trading day than a daily, 2 hour, or hourly chart does. Best Regards, Dave
Hey Dave, that was …
Hey Dave, that was an informative session on Bollinger Bands. I am an active intra-day currency trader and i wish to know which charts are typically suitable for Bollinger Bands in active sessions.I like to look at Daily charts for the broad pattern and break them down to 120 Mins or hourly charts for a trade idea. Appreciate your comments. - Venky
Glad you liked it …
Glad you liked it and if you haven’t already be sure to check out the link in the description as their is some good resources there for other uses of Bollinger Bands as well. Best Regards, Dave
I am new to trading …
I am new to trading to forex and have been using the bollinger bands since the first night. I wish I had watched this video earlier on, especially the tip on the 2nd breakout after a contraction.
Hi Hypno63, Thanks …
Hi Hypno63, Thanks a lot for the feedback I always appreciate the comments and am glad you liked it. Best Regards, David
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