Although Bollinger bands is one of the most used and reliable indicators to determine trends and breakouts. You should use it in combination with other indicators such as the Parabolic SAR which indicates price reversal and the Stochastics oscillator which indicates momentum. These other indicator will help you determine whether the signals provided by the Bollinger Bands are in fact good.
1. Bollinger Bands (BB)
As we discussed in previous posts, the BB is made out of 3 bands: the lower, the middle, and the upper BBs. The middle band is comprised of your commonly used 20-day Simple Moving Average. The "juice", however, is in the upper and lower bands since they will indicate your trading signals. Depending on your setup, the BBs will show the price moving within a range, what is the range of the price 85-90% of the time.
By knowing the range within which the price is moving during a consolidation, you can buy or go long when the price hits the lower band and, conversely sell or go short when the price hits the upper band. Another signal for the BB is when the price breaks through the bands which usually indicate the beginning of a trend in the direction of the breakout.
The Bollinger Bands also help determine the volatility of the market. In a nutshell, a squeeze or narrow band width show a period of low volatility and usually indicates that a surge is impending and, therefore, a strong move in price is about to occur.
You should never use Bollinger bands alone to make your trading decisions. Use the BBs in conjunction with your trend or Fibonacci indicators to make a killer combination to successful trades.
2. Stochastic
Stochastic measures the momentum of the currency pair. The plot range for Stochastic goes from 0 to 100. When the Stochastic goes over 80 that usually indicated that the market is overbought and that a downtrend is about to develop. Conversely, when the Stochastic goes under 20 that may indicate that the market is oversold and an uptrend may be starting to develop. Obviously, at 50 the Stochastic would indicate that the price is flat and there's no movement. Keep in mind that, unlike other indicators, the Stochastic indicator does not signal the highest or lowest price level, but rather a possible reversal of price direction. Like any other indicator, the Stochastic oscillator should be used with other indicator to assist you with your trades.
3. Parabolic Stop And Reverse (SAR)
The Parabolic SAR one of the most used indicators to help determine a reversal in price. As a general rule of thumb, traders go long or buy when the Parabolic SAR dots go below the price line and the opposite is true when the Parabolic SAR dots go above the price line indicating a sell signal. Always keep in mind that this indicator only works when the currency pair is trending and will not produce reliable signals if the currency is consolidating or, in other words, a flat market.
4. Conclusion
Use your chart setup to determine a trend whether you use Fibonacci, MACD, candlesticks, line charts, or any other trend indicator of your liking. Corroborate your entry and exit points with indicators like the ones outlined above and your chances of a successful trade increase dramatically.
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