Bollinger Bands are one of the indicators used by all the traders on Forex, stocks or futures. The purpose of Bollinger Bands is to study the volatility in order to identify the best entry points for online trading.
The inventor of this fantastic tool of analysis is the American John Bollinger (1950), technical analyst, author and successful independent trader.
The Bollinger bands are two bands (a lower one, below the middle average, and a upper one) that reflect (through the calculation of the standard deviation) the central average, usually set at 20 days. Here are represented graphically:
Trading techniques with the breakout of the volatility.
One of the characteristics of Bollinger Bands is that they do not maintain a fixed distance from the central media but there are times with large distances and times of the narrowing of the bands. When the bands narrow, we have a decrease of the volatility due to the prices being lateral. On these occasions the trader can place pending orders: above the maximum or below the minimum period. Due to the low volatility we can assume that there will be a growth and then a huge price movement.
Trading Techniques ” walking” on the bands.
Usually when you see the Bollinger bands, you can mistakenly think that they are supports or resistances for prices. Actually it is necessary to analyze the correlation with the RSI and you might get different information, understanding why we have this style of trading known as “walking” on the bands. This expression refers to a “Long” purchase when prices touch the upper band because they indicate a strong trend and not a remarkable resistance! The trader then will be sure to place his position in the right direction of the market. The Short entrance is instead expected with the prices on the lower band. All must be filtered with the convergence or divergence of the indicator RSI.
This type of trading technique involves the use of a trailing stop -loss that adapts to the minimum of the bullish trend, and that is also the limit of the average central.
Bollinger bands and divergence with the RSI
The Bollinger bands give us different information and that’s why we have different trading techniques. In particular, it is possible to combine the RSI indicator to filter out some data through the analysis of divergent trends.
Through this technique, the signal is confirmed or not by the filter that is the RSI indicator. For example, if prices create a new peak on the higher bands but the RSI is bearish (divergent) the bullish signal is not confirmed but rather it creates a bearish opportunity. Diametrically opposed is to the confirmation of a sell signal: if we have a minimum on the lower band and while the RSI is bullish ( divergent ) the sell signal will be cancelled.