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Bollinger Bands consist of moving averages that can measure the volatility in markets. The upper and lower bands are two standard deviations above and below the moving average line.
John Bollinger created them, hence their name. They are commonly used in many different forms of trading, including forex, stocks, and commodities.
These tools allow traders to spot areas where there is likely to be high volatility in the market so they can plan out their trades beforehand. Identifying these opportunities early on helps you avoid waiting to enter a trade when volatility suddenly increases. If you wait too long, you risk missing your opportunity or executing your trade at an undesirable price level. Even if you miss the opportunity, there will still be other high volatility moments, so don’t get too disheartened.
Here are some examples where Bollinger Bands can be used to help you make profitable trades:
Reasons To Use Bollinger Bands
Fixing Entry And Exit Points For Trades In Trend Trading
Bollinger Bands form well-known support and resistance lines that traders can find entry and exit points. By using these levels, traders can set their stop losses safely from the opposing line while waiting for price action to meet the level it travels towards. When this happens, they plan on exiting at their profit targets or when price action eventually reverses its path to reach one of these bands. This method works best in trending markets.
Scalping Opportunities Using Bollinger Bands
As with the first example, Bollinger Bands are used to identify high levels of volatility in the market. When price action hits these bands, traders can apply entry orders based on these levels for scalping opportunities. Traders tend to look out for trades that have good reward-to-risk ratios so they can achieve a significant return of investment within a brief period.
It works best against the market trend as there have been many studies indicating that prices tend to revert towards their mean value when in an established trending market. The key here is limiting your risk and looking for small targets to get out of the market while still in profit quickly.
Identifying High-Risk Areas To Avoid Losses
Bollinger Bands tend to widen when there is high volatility in markets. The bands indicate that price action will move towards them, thus widening the bands show an increase in volatility which you can use to avoid entering trades when there is high risk involved. When using Bollinger Bands for identifying high-risk areas, it should be noted that they are lagging indicators that measure what has already happened. So it would be best used in hindsight if you find yourself losing too much money during volatile periods. It would not be wise to use this method for entry points because prices can move in that direction for a long time without hitting the bands. It would be best to use Bollinger Bands with other tools for entry points.
Identifying Marginal Trading Opportunities
Bollinger Bands act as an envelope around price action, so it is relatively easy to identify areas where volatility is falling or rising since they are indicated by prices when they move away from the centerline, hence widening the bands.
It works best in sideways volatile markets, which can last for days at a time, so do not get too eager and enter trades every time this happens because sometimes volatility will decrease before rising again after a few hours of no movement. Knowing this information allows traders to plan their entries carefully whilst minimizing risks during these non-volatile periods.
Trading With Trend Lines
Bollinger Bands can be used to identify trend lines when prices move in a specific direction, usually towards or away from volatility when the market is trending. When price action moves within the bands, it shows decreasing volatility hence lower risk trading opportunities since large swings in price won’t occur due to more minor changes in the market. By finding these areas, you decrease your risks when entering trades and allow you to enter into trades more frequently, thus increasing your profits.