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The Traders Wheel
2/8/99 by Alan Farley

Reading Bollinger Bands

Bollinger Bands add horsepower to any trading system. Just set the bands to the popular (20-bar 2-std deviation) inputs and you’ll locate many hidden support and resistance points. They’re also highly effective when examined in multiple time frames. Moving from weekly through intraday bands reveals a multi-trend view with excellent predictive value. Often, reversals can be predicted to within a single bar.

Someday another Edwards/Magee will come along and categorize the different band/price scenarios and assign predictability to each. Until then, these should help:

A. Location And Direction Determine Trading Phase:

1. UPPER VS LOWER ACTION

Location of price bars determines the strength of the current phase. Price within the upper band signifies power while price within the lower band signals weakness.

2. PRICE DIRECTION

Direction of price within the band identifies convergence and divergence with the current trend. Rising price within the lower band and falling price within the upper band signal divergence while rising within the upper and falling within the lower signal convergence.

3. TREND TESTING

The lower band, middle band (center average) and upper band represent support/resistance for the trend. Reversal off any band increases odds that price will expand in the reversed direction and return to the last band crossed or touched.

B. Penetration Through the Center Band Increases Directional Momentum:

1. CROSSING FROM BELOW CENTER TO ABOVE

Uptrend increase in strength. Observe directional movement of the upper band as price approaches.

2. CROSSING FROM ABOVE CENTER TO BELOW

Downtrend increase in weakness. Observe directional movement of the lower band as price approaches.

C. Bands Open In Response To Awakening Trend:

1. CLIMBING THE LADDER

If the angle of the upper band rises in response to approaching price, expect a series of upward price bars, each riding higher along the top band. This is an uptrend in progress. Conversely, price striking into a horizontal upper band predicts reversal and resistance.

2. THE SLIPPERY SLOPE

If the angle of the lower band falls in response to approaching price, expect a series of downward price bars, each pushing lower along the bottom band. This is a downtrend in progress. Conversely, price striking into a horizontal lower band predicts reversal and support.

ratl.gif (6776 bytes)
Bollinger Bands define natural extremes in trend development. As bands are hit, price often bounces backward until sufficient strength can push the band out of the way. Note how RATL’s action reverses immediately when price thrusts too far outside these well-defined barriers. The most sustainable trending occurs when price clings to the band’s edge.

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

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