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How To Use Bollinger Bands For Profit PDF
How To Use Bollinger Bands For Profit PDF
Aside from being a very nice French Champagne (James Bond’s favorite, I believe), Bollinger, John
Bollinger is the name of a gentleman who developed a technical trading tool in the early ‘80s that we
call the Bollinger Bands (I’ll try to refrain from making a music pun here.)
While there is nothing complex about the Bollinger Bands, they can be a powerful signal to enter/exit
a position.
By default the bands are two standard deviations from the moving average.
The result is, you have outer bands that follow a moving average.
Meaning the outer bands expand during trending times and contract during consolidation times.
This is a great solution to finding a target for trading bounces from moving average. (Click here to
learn more on the moving average strategy.)
Or using them to find a place to trade a snap back to the moving average.
The calculations are based strictly on the price action and the defaults can be changed to smooth
the bands out or to make them more responsive.
A Simple Moving Average longer than 20 periods can be used to smooth the bands and a larger
than two standard deviation figure can be used to reduce the number of trade signals produced by
the bands, thus making the signals more significant.
There are several ways to profit using the Bollinger Bands. I’ll present one good strategy here
and leave others for a future article.
In addition to using the Bollinger Bands with the default 20 period Simple Moving Average and the 2
Standard Deviations, I recommend you add a 200 period Simple Moving Average indicator.
The trend will be determined by the position of the current price with respect to the 200 SMA.
Enter the trade when price touches the outside edge of the Bollinger Band.
If price is below the Bollinger Band, you will only trade short when the price touches the top of the
Bollinger Band.
If price is below the Bollinger Band, you will only trade long when the price touches the bottom of the
Bollinger Band.
You will exit the trade (hopefully with profit) when the price touches the opposite side of the Bollinger
Band.
There are times when the price action will touch the Band and continue moving in the same
direction.
If you have an open position and price pushes through the 200 SMA, exit the trade immediately.
The stop loss will depend upon your time frame and trading instrument.
I would look at the historical candles on your trading instrument and time frame.
This tells you how far the price has moved against the strategy in the past to determine the amount
you want to allow your trades to swing before you close them.
Make this decision in advance to be sure that you don’t “change your mind” while you’re in the trade.
These decisions are best made in advance when you are not under the pressure of a losing position.
As I’ve said with prior strategies, you can close half of your trade at the target and set the Stop Loss
to Break-even (don’t forget the spread and commissions) and let it run.
Understand that price does not always drop immediately when touching the Band.