Wednesday, March 19, 2008

Simple Application of Bollinger Bands

The Bollinger Band is one the most popular used by traders to determine trend and the limit of movement (support & resistance level). It is constructed using three moving average lines designated by the upper band, middle band, and lower band. These three bands are the ideal setups or targets profit for trading or commonly known as support and resistance level. Apart from that it is also can be used to signal break-outs.

How to use Bollinger Band?

As you may notice in everyday trading, the chart/market generally moving within the limit boundary of the bollinger bands. For example it moves from bottom to top and top to bottom passing by the middle band where usually there is a break taking place. The bollinger band is simply a dynamic support & resistance level.

The band is very dynamic where sometimes it can get wider or squeeze narrower. Using this behavior technical traders use it to determine the break-out of the market. Usually when the band squeeze and getting narrower the probability of break-out is near. As the break out occur the band become wider and eventually develop narrower gap before making another break-out.

Another application of the Bollinger Band is use to determine a continuation of a trend. Using an up-trend example the candlestick chart move closely along the upper band marching upwards. There will be time that traders wants to get profit from every movement a correction will occur. As the correction occur the chart/movement will fall at the middle band instead of the bottom. This indicate that a trend is still underway. If the chart fall on the bottom it signals a trend reverse is about to begin. Read more on this go to here "Using Bollinger Band "Bands" To Gauge Trends"

In complex application bollinger bands need more than just of the applications mentioned above. And a vital success of using this tool will also depend on how far you are familiar with multiple time frames application.

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