Bollinger Bands

Contracting bands warn that the market is in the trend: the bands first converge into a narrow neck, followed by a sharp price movement. The first breakout is often a false move in a strong trend in the opposite direction.

A development that begins with a band which normally carries up to the other in a wide market.

A move outside the band shows that the trend is strong and will likely continue - unless price quickly turns.

A trend that hugs one band signals that the trend is strong and will likely continue. Wait for the differences (when the price is flat or rising or falling, but the MACD is in the opposite direction ... the price will break out in the direction of MACD) or a Momentum Indicator to signal the end of a trend.

I use BB for an indication of when a breakout or breakdown is imminent. Once outside the bands may be very narrow, it means that the price is consolidating and is getting ready for a breakout, either up or down.

At this point, it is dangerous to have a position because you do not know if it is possible to break up or down. When bands are very narrow, it's almost better to close your old positions, even at a loss, until you see a clear direction. If you do not want to close out an old position at a loss, at least secure it. See more about hedging instrument later in the Advanced Day Trade Forex course.

The BB's can not say which direction the breakout will be the chaos Oscillator (MACD) and Momentum will do that, and I always trade in the direction of momentum and Chaos (MACD) are going.

Sometimes when using the slower timeframes, I use the outer BB's as targets for my limit sell price. If the straps are really wide after a great move, I use my band as my limit target price.

Bollinger Bands are designed to capture the majority of price movements. When prices move beyond the upper or lower band, they are considered high (overbought) or low (oversold) on a relative basis.

More on Using Bollinger Bands:

First, the BB's can be used as I mentioned earlier, as price targets. If the bands are narrow, the price will jump up and down in the two outer bands. As previously mentioned, this is not the best time to put on the trade, as trading range is too narrow, if you can not make a decent quick profit in the January 1 or 5 minute chart.

If the area is too narrow, you can go up and down and book kernels. I just try this in the January 1 or 5 minute timeframe using the 5/9/18/50 EMA's. Do not do it if you can not make at least 5-10 pips up and down. The danger lies in whipsaws.

Most of the time, unless the straps are too narrow, you can make transactions literally bounces off the outer band.

This is called "The Bollinger Bounce".

When a trade, just set the stop at the outer BB and your price target limit sell order where the second outer band.

If your trade rapidly approaching the limit price and all indicators say that the price is just getting started and is not likely to quickly turn on you, then you should first either remove your limit price & let the price run, or increase your limit price another 5 -10 pips. Then raise your stop to either your gateway or beyond it, to lock in either zero or a profit in case the price suddenly turn on you.

This is definitely what you should do a price breakout. If the price continues to go up in an extended breakout, you just keep adjusting the stop up to lock more profit (this is called a subsequent stop, more later on this subject) and keep raising your limit also.

A Super Advanced method of using BB's is to use two sets of BB's, both with my band was set at 18. Ask a BB with a standard deviation of 3 and let other standard deviation of 1. This gives you 6 short term support / resistance lines to work with. Your first stop and the target is the outer band, and your internal links are used for your closing stop and short-term resistance and support. You can also trade outside the two inner bands.

This method is very similar to using Fibonacci or Average True Range (ATR), but is much easier to use and understand.