In its simple form, Bollinger bands measures volatility in price action and signals to a trader points in time where price is highly likely to continue or reverse direction. When you get into the details regarding Bollinger bands it's kind of funny because the set-up for the reversal and the continuation are nearly identical. YES it's true. They say when Bollinger bands closes outside of a 2.0 standard deviation upper or lower band a reversal is likely because price will spend 99% of its time inside the bands, so when we get a close outside a band we have a high probability of a reversal.
This is true, however the strongest positions I have ever entered that moved the fastest did EXACTLY the opposite. Let me tell you what I mean. You see in order to read Bollinger bands like a seasoned pro, in fact BETTER than a seasoned pro. You must pay attention to what the bands themselves are doing as price shall we say “exits” the bands.
That is when price closes below the lower band, and you're eagerly anticipating taking a long position, stop for a second and look at how BOTH bands are responding to approaching price action to the lower band. As price approaches the lower band what's the lower band doing? At the same moment in time what is the upper band doing?, because if they are both turning outward and have the look of DRASTIC EXPANSION, then there is a very high likelihood that a reversal is out!
There are a couple things to pay attention to. As the bands expand this indicates expanding volatility. If price has closed lower and closed below the lower band and as described above, both bands are turning and opposing each other (I sometimes refer to this as heading North and South.) then what is happening is price is going to continue to fall for a time.
It is likely in fact that price will plummet a little faster as long as the bands are expanding and price has closed below the lower band.
You will likely be tipped off as to when this move will end by the bands as well. Watch the bands, as soon as they stop heading in opposite directions you can expect the move to slow or end.
Again, a close watch of Bollinger bands is key. There are only a few ways these bands can correlate to one another and the way they do this relative to one another and price provides very predictive insight to the prepared trader.
Be aware that there is sometimes a “head fake” that takes place in this set-up where price does exactly as described here and then takes off in the opposite direction. Your stop and entry are key. Study past price action for clues on a marvelously profitable system with these key ingredients.
A Bollinger band trading system is a simple straight forward method to trade with great success. Bollinger bands measures volatility which is more predictive than price itself. A knowledge of how to use Bollinger bands is a profitable venture, don't even hesitate!