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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.
