Bollinger Bands can be a one of the most powerful technical indicators out there. We’ll first explain what Bollinger Bands are and then how to use them with real examples. Remember, this should not be considered as advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling securities or other financial products or instruments. You can loose money, so play it smart.
What are Bollinger Bands?
Bollinger Bands consist typically of the 20 day moving average(line in the middle) and 2 other lines showing the standard deviation. Most traders try to buy when it hits the bottom standard deviation line and sell at the high deviation line, but this strategy isn’t very profitable. Some try to buy when the standard deviation narrows which may show possible increases in future volatility, but this again isn’t very good. Below you will see that the Bollinger band are in blue while the moving average is in red.
What is our strategy?
Step 1: look for a stock that has a long term uptrend(or at least a moving average that is moving in the upward direction. This is important or you may loose money
Step 2: look for a stock that has recently went above its 20 day moving average
step 3: Hold the stock until it either goes below the 20 day moving average or if it’s been hugging the upper band and starts to deviate from it then sell quickly.
Theoretically this strategy shouldn’t give any major losses because the max you will loose is a few cents when it crosses the moving average. If you followed step 1 the moving average will be going up everyday and so after the first day you shouldn’t loose money. That’s the power of this strategy– It minimize losses and if correctly used you shouldn’t ever have a loosing trade. Lets see some examples…
As you can see the blue arrows indicate uptrend where the moving average is going up(or your stop loss according to this strategy). Green arrows show moves above the 20 day moving average and red arrows show when a stock starts moving away from the upper bands. These are just 2 buy and sell signals but i see about 5 more. After the first red arrow shows why you don’t buy in down trends– You loose money(very important for this strategy).
Example 2: AMZN
Amazon is another stock that has a long term uptrend and and you can see that the majority of trades using this strategy are profitable.
This strategy rides the wave of a uptrend while minimizing the risk of possible stock crashes and corrections. using this strategy over time can help you use it more effectively and increase you profits. Of course like any other strategy if you don’t use it correctly you can end up loosing money. If you have questions or comments just comment them below and I’ll try to respond. I’m a small website so please support us by bookmarking us and visiting us again for more content to help you trade.
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