Three Things You Can Do Immediately Increase Your Trading Profits With Bollinger Bands – and How To Cut Your Losses By 50% or More

Bollinger bands are one of the most useful indicators ever created. By measuring the volatility of price action on a chart the bands can provide keen insight into future price action.  Using the moving average Bollinger bands looks back and calculates a mean and plots the bands by a specified deviation based on your input.  This could be 1, 2 or even 3 standard deviations from the mean.  In some cases I will even plot all 3. 

The distance, as represented between the upper and lower Bollinger band, reflect the standard deviation of the price movements or volatility.  As activity becomes more volatile, the band expands further away from the moving average, and conversely, contracts towards moving average during periods of lesser volatility. 

Bollinger bands can be used in various ways, but are particularly accommodating for the following three reasons:

Strategy #1: They help to identify new trends. 

One of the more outstanding strategies in producing profits is to take positions after a price breakout has occurred from a preceding period of relative stagnant range trading.  Such a period would be characterized by low volatility or narrow Bollinger bands.  

Thus, for an individual investor, when he or she has identified a breakout through the use of Bollinger bands, it is a high probability event that a new trend is about to establish itself, and therefore, represents an opportunity to undertake a profitable trade. 

Strategy #2: They improve trading timing. 

Within any existing long term trend that has clearly delineated itself on a historical price chart, Bollinger bands can be extremely helpful in determining entry into the market to maximize investment returns.  

In any strong bull or bear market, it can be seen that during a longer trend, prices will often show corrections that revert back to the moving average.  Consequently, in any strong trending market, retracements from the upper or lower bands to the center moving average represent ideal opportunities for undertaking a position in the direction of the longer term underlying trend. 

Strategy #3: They help in identifying market bottoms and tops. 

More likely than not, it can be observed that when prices reached the upper limits or lower limits represented by the Bollinger bands, they retrace themselves to the fair value represented by the moving average.  As a result, these band levels represent high probability situations in which to profit from retracements.

Bollinger bands, in essence, measure the volatility of price movements for any market investment at a particular point in time.  They are one of many indicators that can be successfully utilized for profitable trading.  On a stand-alone basis, it is never recommended to use only one available tool for investment decisions, and Bollinger bands are no exception.  They are most effective when used in conjunction with other indicators that confirm an investor’s identified opportunities.  When used in this fashion, they offer the individual the possibility to obtain exceptional returns on his or her capital.