If I wanted to master Bollinger bands how would I go about it? Good question and the first thing is to understand what Bollinger bands is and what it measures. The bands are a representation of standard deviations from the mean, usually 1 to 2 standard deviations.
This alone is rather revealing because when you understand the concept of reversion you understand that price stays within the 2nd standard deviation around 85% of the time. You might not connect the dots at this point, but what you should be concluding is that if price closes outside the 2.0 standard deviation and IF it stays inside 85+% of the time then there’s at least an 85+% likelihood that price will reverse here. (Potential entry maybe?)
That said the next step for the observant connoisseur is to develop a rule set for entry that allows you to enter a trade and exit a trade and capture a profit most of the time.
Sometimes it might be prudent to adopt an overbought/oversold criteria for entry thereby increasing the likelihood of a decent sized move, and at least an initial push in the favored direction moving price away from your stop and minimizing your risk.
Keep in mind that the more rules you establish for entry the more likely you are to miss a potentially profitable trade. As you develop your rule set keep in mind that the most profitable rule sets have a win/loss ratio, some you will win and some you will lose.
If you try to get a 100% win ratio your profits will diminish because of the amount of missed trades. This right here is one of the keys to your long term success; don’t try to find the flippin HOLY GRAIL because it passes up to many trades – period.
Find a balance between wins/losses and remain exposed to profits as well as risk, because if you remove risk you remove the opportunity for exposure to profits.
That said set up your charts and lay down a 1.0, 2.0 and 3.0 standard deviation over price and you’ll get a nice set of bands that will allow you to watch price and create a rule set. Start out with a 2.0 standard deviation method and go from there.
You might consider any close beyond 2.0 standard deviations where a slow stochastics is in the favorable overbought/oversold condition giving off a buy or sell signal. If you’re going long draw a line at the high of that trigger candlestick and enter as soon as price crosses or closes beyond that high.
There are a number of variations but this should get your thinker going. Bollinger bands are an awesome tool for any type of trader. If you aren’t using them now then you are missing out on a view of price you won’t see with any other indicator.
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