Bollinger bands are one of the important technical indicators that are used to measure the volatility in the market. Bollinger bands show the standard deviation of price away from its 20 period moving average. Most traders use Bollinger Bands (BBs) for range trading. But in this article, we will learn how to use the Bollinger Bands to trade trends.
Now, if we superimpose a second set of BBs with standard settings of 1 standard deviation on to a price chart that already has a BB with the default settings of 2, you will be surprised to find out as the price action tends to start trending in the market, it will be contained in the 1SD-2SD BBs.
These BB bands divide the price action into three separate zones. If prices are between the upper 1 SD BB and the upper 2 SD BB, they are in the buy zone. If the price action is between the lower 1 SD BB and the 2 SD BB, it is in the sell zone. The area between the second Bollinger Band Bands is known as the no man’s land as the price action is struggling to find direction here.
So when the price action is between the buy zone, it is in an uptrend. When the price action is between the sell zone, it is in a downtrend. When it is in the no man’s land, it is essentially directionless.
When the price action enter the buy zone and closes within it, you can enter into a long trade at the close of the entry bar with the stop loss at the low of the entry bar. Exit the trade as soon as the price action enters into no man’s land.
Similarly, the rules for making a short trade are: price action must enter the BB sell zone. The price should close within the sell zone for you to enter into a short trade. Enter into a short trade at the bottom of the entry bar. Place the stop loss at the top of the entry bar. If the trade moves in the right direction, exit only when price action closes above the sell zone.
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