Bollinger Bands in a Trending Market
One tool that is often used for range-bound strategies can also be helpful in trend discovery.
We’re talking about Bollinger Bands or just Bands.
One thing you should know about trends is that they are quite rare.
Contrary to what you might think, prices range 70-80 percent of the time.
It is the norm for the price to range.
So, if prices deviate from the “norm” then they must be in a trend, right?
What is one of the best technical tools we have mentioned in the previous grades that measure deviation?
If you said a ruler, we give you mad props for effort.
Bollinger Bands contain the standard deviation formula. But don’t worry about being a nerd and figuring out what that is.
Here’s how we can use Bollinger Bands to determine the trend! Prepare for the craziness.
Place Bollinger Bands with a standard deviation (SD) of “1” and another set of bands with a standard deviation (SD) of “2”.
You will see three sets of price zones: the sell zone, the buy zone, and the “No Man’s Land“.
The sell zone is the area between the two bottom bands of the standard deviation 1 (1SD) and standard deviation 2 (2SD) bands.
Bear in mind that the price has to close within the bands in order to be considered in the sell zone.
The buy zone is the area between the two top bands of the 1SD and 2SD bands.
Like the sell zone, the price has to close within the two bands to be considered in the buy zone.
The area in between the standard deviation bands is an area in which the market struggles to find direction.
Price will close within this area if the price is really in “No-Man’s Land”. Price direction is pretty much up for grabs.
The Bollinger Bands make it easier to confirm a trend visually.
We can confirm downtrends when the price is in the sell zone.
We can confirm uptrends when the price is in the buy zone.
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