Your tools will give you a better chance of making good trading decisions when you use the right tool at the right time.
Bollinger bands are used to measure the market’s volatility. They act like mini support and resistance levels.
- A strategy that relies on the notion that price tends to always return to the middle of the Bollinger bands.
- You buy when the price hits the lower Bollinger Band.
- You sell when the price hits the upper Bollinger Band.
- Best used in ranging markets.
- A strategy that is used to catch breakouts early.
- When the Bollinger bands “squeeze”, it means that the market is very quiet, and a breakout is imminent. Once a breakout occurs, we enter a trade on whatever side the price makes its breakout.
MACD is used to catch trends early and can also help us spot trend reversals.
- It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
- Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
- MACD’s downfall is its lag because it uses so many moving averages.
- One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.