Bollinger bands are quickly becoming my favorite indicator. They are very simple to use, they are intuitive, and they tell you so much about the market at just a glance. But how do you use Bollinger bands to make money? Let me show you 3 simple steps that work just about every time.
1. Wait for the market to hit the outer bands
A quick math lesson about standard deviation. Standard deviation is simply a statistical measurement of the amount of data within normal bounds. Is that confusing?
Well, let me tell it to you straight. The outer bands of Bollinger bands are standard deviations measurements. So when price hits these bands, this means price is at an unusual extreme. What would you think the market would do if it hit unusual extremes? Probability tells you that the price should return back to normal eventually, so that means price should turn around.
Simply put, when price hits the outer bands of Bollinger bands, you should look for the market to turn around.
2. Use candlesticks, stochastics, or support and resistance
So you know when the market should turn around, how do you determine when it will turn around?
You need another indication, and candlesticks, stochastics, or support and resistance are great options.
Candlesticks – look for an engulfing pattern where the market moves back toward the center of the Bollinger bands.
Stochastics – look for the stochastics to change direction and move back to the center.
Support and resistance – are the Bollinger bands right around major support and resistance? If so, you have a beautiful trading opportunity.
3. Watch for breakouts
Bollinger bands are awesome at showing volatility. You will definitely notice when the bands get really close together. This means that the market has grown quiet. The good news is that calm usually proceeds the storm. This means that the market is setting up to really start moving.
When you see Bollinger bands real close together, switch to your favorite breakout trading strategy and make some serious money.
