(4) Identifying Trend Reversals With Bollinger Bands
It is one of the most critical guidelines or tips for day trading with Bollinger bands. Trend reversal is found to occur when the direction of a financial instrument changes & moves back in the opposite direction.
If you are successful in identifying this critical situation in early stage then you are likely to gain huge profits quickly. Here are some of the major guidelines for spotting trend reversals in prevailing trends:
(a) When the price is in an uptrend it is likely to touch or run along the upper band & not lower band. If the price hits the lower band then it indicates that a reversal has commenced.
In such a situation, if the price rallies again then it wouldn’t be able to touch the upper band or recent price high again. Therefore, traders can make short positions during pullback rallies by keeping stop loss order at upper band.
(b) When the price is in a downtrend it is likely to touch or run along the lower band & not upper band. If the price hits the upper band then it indicates that a reversal has commenced.
In such a situation, if the price declines again then wouldn’t be able to touch the lower band or recent price low again. Therefore, traders can make buy positions during pullback decline by keeping stop loss order at lower band.
(5) Understanding The Role Of Simple Moving Average
It is one of the most desirable tips for day trading with Bollinger bands. A simple moving average (SMA) is an arithmetic moving average that is calculated by adding the closing price of the financial instrument (such as stock or bond or currency) for a number of time periods & dividing this total by number of time periods.
In an ongoing trend, moving average often holds very accurate. Any breakout of moving average is considered a meaningful signal that indicates a shift in the market sentiments. Here are some of the guidelines for using moving average for trading:
(a) During a strong trend (either uptrend or downtrend), the moving average (middle band) is used as a re-entry signal to make new or add to existing positions during pullbacks.
(b) Traders can also use moving average to exit their existing position. In this strategy, traders don’t close their existing positions unless price has broken the moving average.
(c) A setting of 9-12 in simple moving average will be best for day trading. For example, it is common to use 20-day for position trading and 10-day for swing trading.
Thus, Bollinger bands can provide valuable information about the prevailing trend, buyer/seller balances as well as potential shifts in ongoing trend.
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