But sometimes is difficult to determine trend,because after strong trend the market is behaving strangely.
Bollinger Bands Indicator free download
Like anything related to trading, there is a trick here too. You should ignore all other reversal patterns that are not touching the two volatility lines. The example above shows a dark-cloud cover forming at the end of a bullish trend, with both candles that are part of the reversal pattern touching the UBB volatility line.
This is enough to take a short trade. As a take profit and finding your risk-reward ration, you can use the length of the dark-cloud cover To calculate it, simply measure the highest and the lowest point in the dark-cloud cover pattern.
Then multiply it by 2. The stop loss should be the highest point of the reversal pattern. You can use a bigger risk-reward ratio, but that would not be a realistic approach. In the example above, you seethat the dark-cloud cover acted as a Bollinger Band squeeze indicator as the price action that followed reached the take profit and some more. The same is valid for the hammer reversal pattern that follows.
By definition, a hammer is a bullish reversal pattern, meaning a bearish trend must be in place. Such a tutorial is like a trading plan that has both entry and exit levels. And it is a must have for every trader interested in mastering the Bollinger Bands width indicator. Another great way to use Bollinger Bands is to integrate the indicator with the Elliott Waves theory. This is one of the most popular trading theories that exists. After all, what is Bollinger Bands indicator if not one that looks for reversals or continuation patterns when crowds are on the other side of the market?
This is exactly what the Elliott Waves theory is for. A bullish trend, therefore, will have five waves to the upside, corrected with three waves to the downside. The key to understanding how Elliott Waves works is to know that even within the five-waves that are defining a bullish move, there are two waves that move in the opposite direction.
Bollinger Bands trading works in both the five-wave structure and the three-wave structure that corrects it. According to Elliott, a 5-wave structure is impulsive and is labeled with numbers. The name of the three-wave structure is a corrective move and is labeled with letters. This should happen based on the letters or numbers that appear on the screen. The Bollinger Bands bandwidth acts both as a reversal pattern, when fake breakouts appear, as well as a continuation pattern.
The example below is relevant. That means that one wave should stand out of the crowd, to be the longest. Typically, that wave is the 3 rd one, but this is not mandatory. Traders have the tendency to look for a pullback to come, as the second wave. And then to buy that pullback if the impulsive wave or the five-wave structure is bullish or to sell a spike if the impulsive wave or the five-wave structure is bearish. Such a retracement is almost always coming after a breakout that suggests volatility is on the rise and the ranging environment ended.
The chart above shows a flat pattern labeled a-b-c in magenta. Elliott found that the c-wave in a flat is always an impulsive move. Therefore, it is obvious that the waves within the c-wave must be labeled with numbers. However, a closer look shows that the first bearish breakout appeared way before the start of the c-wave. It formed when the a-wave in magenta ended.
The chart below shows the opportunities given by Bollinger Bands if used in conjunction with a corrective wave within the Elliott Waves theory. The arrows on the chart show possible places to add in an already bearish trend. They can be part of a trend following or a Bollinger Bands scalping strategy.
In the example above, the Bollinger Bands indicator works to find entries in a corrective wave of a bigger degree. However, the same works in an impulsive move. They are most likely part of a bigger degree corrective wave, like a zigzag or a zigzag family pattern.
Combining Bollinger Bands and the Elliott Waves, you increase the chances to trade corrective waves more than impulsive moves. In both cases, a breakout shows the right direction. As mentioned earlier, the price is spending most of the time, more than ninety percent of it, within the UBB and LBB lines. A breakout, therefore, is a heads up for the move to come. However, fake moves can appear. Algorithmic traders or robots govern trading these days.
They execute thousands of trades per second and run on supercomputers. Humans are following robots for a few decades now, and this is not going to change anytime soon. Technological advances and the speed the industry is changing will allow for more and more spikes in volatility to occur. Based on this article, volatility is best measured with the Bollinger Bands indicator.
The key to staying profitable is to quickly reverse a position when a fake breakout occurs. What traders are doing is they try to identify ranging and trending conditions with the Bollinger Bands. It is the smallest distance on the whole chart, signaling the fact that a break is imminent. It shows a period more than two months where price simply consolidated, between August and October For traders using pattern recognition to spot trades, that period shows a triangle.
The next step is to go and do some back-testing on historical data. But have two conditions in mind: The idea behind back-testing this is to see if similar small distances between the UBB and LBB lead to important breakouts that you can trade just like the example above shows. Different currency pairs have different volatility levels, as not all pairs are moving in the same way. Liquidity plays an important role, and the trading session as well.
Below you will see a trading example that includes the Bollinger Bands indicator. This is a video that shows how to use the indicator successfully. I entered a long trade based on bullish signals of the Bollinger Bands. Let me walk you through the points 1 to This is a very bearish signal. Suddenly failing to reach the bands can signal fading momentum.
It tried to pull away, but bears were always in control. There are two types of tops that you need to know about:.
This signal is usually accompanied by an RSI divergence. The screenshot below shows both scenarios. The first is the top after a divergence. You can see how the trend became weaker and then eventually failed to reach the outer Band before reversing.
I marked the second spike with an arrow which was a trend continuation signal as price failed to break higher during the downtrend. The strong spike that was followed by a fast rejection showed that bulls lacked power.