The basic idea behind learning how to read Bollinger Bands is that they serve as a fundamental trend indicator. They can confirm the direction of a trend and the size of a stock’s float. The bands also help you identify when to enter and exit a trade. Listed below are some tips for understanding how to read Bollinger Bands. To master this technique, practice on a few stocks first.
The first thing you need to do is determine whether or not the market is likely to break out of a range. Low volatility limits the range of Bollinger Band readings. When the volatility increases, the bands begin to move. The trend analysis that follows this strategy looks for signs of lower resistance testing before a sharp price rally. This can be done when there is low volume. This can be a great time to buy and sell.
The second way to use the bands is to analyze the price movement between the two bands. The bands define the overbought and oversold conditions of the market. When the upper and lower bands reach their respective thresholds, the prices have reached overbought or oversold conditions. Traders who use these indicators can use them to predict if the market will hit either overbought or oversold levels.
In addition to using these bands to identify possible price reversals, they can also be used to time your entries during range markets. This way, you can trade based on the trend without having to perform extensive research or trade blindly. Nevertheless, you should always remember that you shouldn’t rely on this indicator blindly. It’s important to use the tool as a guideline and not a trading strategy.
While using Bollinger Bands for trading, it is vital to have a proven plan in paper before applying it to the market. Always remember that the closing price of each bar is a crucial aspect of the strategy. The best chart setup for this strategy is a Line On Close (LOC) chart. The first bottom of a double bottom strategy tends to close outside of the lower Bollinger Band. Hence, the second bottom is unlikely to close outside of the lower Bollinger Band.