Important Stocks To Watch - Breakout Stocks

Long Term Breakouts To Watch

Stocks At 50 MA & 200 MA

How To Use The Bollinger Bands

While I do not use the Bollinger Bands that often, this technical indicator created by John Bollinger is very popular among traders. Therefore, it warrants to have its own page in this trading course so that you are aware of this technical indicator. Perhaps you may find it useful as well.

The Bollinger Bands is the green moving averages in the chart below. Usually, the basic period will be a 20 moving average with the upper and lower bands 2 standard deviations away from the 20 MA.

  • 90% of price action will trade within the bands
  • Prices tend to bounce off the upper and lower bands
  • You can combine other indicators like stochastics for more accuracy
  • When prices are above the upper band most of the time, the stock is in an utprend
  • When prices are below the lower band most of the time, the stock is in a downtrend
  • Prices tend to bounce off the middle of the band when a stock is trending
Chart courtesy of Stockcharts.com

In the chart above, you can see that the stock traded within the band 90% of the time. You will also notice that prices tend to bounce off the upper and lower bands. Everytime the price touches the upper band, prices tend to fall. When the price touches the lower band, prices tend to rise. Notice how you can combine the stochastics overbought oversold signal for more accuracy.

From December to February, the stock was in an uptrend. When the stock is trending, price will often bounce off the middle band which is the 20 MA. You can often pick up stocks when they fall to the middle of the band and ride it higher selling it a few days to few weeks later.

Chart courtesy of Stockcharts.com

In the chart above you can see how the Bollinger Band provided a swing trade setup when the stock touched the middle of the band in early 2017. The stock was already in an uptrend. Traders could have bought the stock for a swing trade to the long side.

Bollinger Bands Squeeze

Some traders use the Bollinger Bands squeeze to help them spot the beginning of periods of higher volatility. A squeeze is when the bands contract. Following the contraction, the bands will often expand.  Prices often run higher or lower rapidly after the squeeze. But the squeeze does not tell you the direction of the run. You will have to use other types of analysis to determine that. I do not use the Bollinger Bands squeeze because I understand that periods of low volatility is often followed by periods of high volatility. 

Stock Market Secret : Low Volatility Is Followed By High Volatility

Chart courtesy of Stockcharts.com

In the chart above, you can see how ABC had a few Bollinger Bands squeeze. One in late October, one in December and one in late January. These squeezes shows us that the stock is about to enter a period of high volatility.

Chart courtesy of Stockcharts.com

Divergences In Double Bottoms And Double Tops

Another very useful way the Bollinger Bands can help the trader is to help us identify strong candidates for double bottoms and double tops. For example, a stock may formed a double bottom pattern and you notice the stock's price penetrated the lower band in the first bottom. However, the price did not penetrate the band in the second bottom. This shows lack of strength in the bears. It shows internal strength in the stock.

In the chart above, you can see APA formed a double bottom from August to September. The price of the stock penetrated the band when it made the first bottom. However, on the second bottom, the stock did not penetrate the band.

This told us there was strength in the stock. This is a bullish divergence in the Bollinger Bands. Notice in the chart above, the stochastics indicator also had a bullish divergence. The stock was also at the 200 MA Support. These powerful combinations gave us a very reliable double bottom trade.

If you want to spot a reliable double top, you will have to make sure the first top penetrates the upper band and the second top stays within the band. This shows us a bearish divergence.

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