If you wanted to master Bollinger Bands, how would you do it? Good question and the first thing is to understand what Bollinger bands are and what they measure. The bands are a representation of standard deviations from the mean, typically 1 to 2 standard deviations.
This alone is quite telling because when you understand the concept of a reversal, you understand that price stays within the second standard deviation about 85% of the time. You may not connect the dots at this point, but what you should conclude is that if price closes outside of the 2.0 standard deviation and IF it stays within 85% of the time, then there is at least an 85% chance that the price reverses. here. (Potential entry perhaps?)
That being said, the next step for the knowledgeable observer is to develop a set of entry rules that will allow them to enter and exit a trade and capture a profit most of the time.
Sometimes it can be prudent to take an overbought/oversold approach to entry, which increases 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 stop. risk.
Keep in mind that the more rules you set for entry, the more likely you are to lose 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 win ratio of 100%, your profit will decrease due to the number of losing 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 happens to a lot of trades – period.
Find a win/loss balance and stay exposed to both gain and risk, because if you remove risk, you remove opportunity for gain exposure.
That being said, set up your charts and set a standard deviation of 1.0, 2.0, and 3.0 on the price and you’ll get a nice set of bands that allow you to watch the price and create a set of rules. Start with a standard deviation method of 2.0 and go from there.
You can consider any close beyond 2.0 standard deviations where a Slow Stochastic is in the favorable overbought/oversold condition that issues a buy or sell signal. If it’s going to be a long time, draw a line at the high of that trigger candle 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 amazing tool for any type of trader. If you’re not using them now, you’re missing out on a price view that you won’t see with any other indicator.
