A Simple and Effective Bollinger Band Technique
A number of complicated Bollinger band techniques exist and these have been proven to be very reliable. Often these slightly more advanced strategies involve using Bollinger bands in conjunction with other indicators, but the average trader does not have to resort to these methods in order to glean some useful information on future market direction. Bollinger bands can be used in a variety of very simple ways too and these techniques can also prove to be effective in helping traders choose when to enter and exit the market place. One of these techniques is known as the broken band technique and it has been proven to be a fairly reliable indicator of a change in market price.
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Bollinger bands consist of a lower, upper and middle band. The middle band represents a moving average which changes with the current price. The upper band portrays the overbought region of a security whilst the lower band demonstrates the oversold region of that security. The information on display is clearly understandable and can be used by novice traders as well as advanced traders. Interpreting the bands is a simple process and traders can see that a good time to enter the market is when the price of a security is hitting or approaching the overbought and oversold conditions. This usually indicates the price will soon change direction and is a reliable indicator to enter the market. The broken band technique is very similar to this process and has also become known to be relatively reliable.
The key difference between the trading technique already described and the broken band strategy is the behavior of the price of a security in relation to the lower band. In the previous strategy traders are recommended to act when they see the price hit or get very close to the lower band but in this instance the characteristic to look for is the price breaking the lower band. Once the price has broken the lower Bollinger band and that candlestick has closed lower than the band, it is a strong signal to place a buy. This situation occurs when there is heavy pressure on the selling of a security and this leads to the price going lower than the oversold conditions of the lower Bollinger band. Once this characteristic has been noticed by a trader it provides an excellent signal to enter the market because evidence suggests that once a candlestick closes below the lower band, the price of the security is very likely to revert back toward the moving average line and possibly even beyond that. If this occurs the trader stands to make a healthy profit if they bought during the oversold conditions.
As with any trading strategy this broken band technique is not flawless and there is a drawback that occurs every now and then. Occasionally the heavy selling pressure continues and it is possible that consecutive candlesticks break the lower band and push the price even further down. In this instance a stop loss is necessary to prevent any disasters. Once you grasp the powerful low risk high odds set-ups afforded by Bollinger band trading you will never trade without insight from this indicator again.
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