When candle 2 engulfed and closed below the open price of candle 1, it indicates a change in momentum from up to down. Ultimately the more pieces of the puzzle that are put together, the more confidence should be instilled in the trader.
Chart analysis with Bollinger Bands ®
Periods of expansion are then generally followed by periods of contraction. It is a cycle in which traders can be better prepared to navigate by using Bollinger Bands because of the indicators ability to monitor ever changing volatility.
Of course, just like with any indicator, there are exceptions to every rule and plenty of examples where what is expected to happen, does not happen. Previously, it was mentioned that price breaking above the Upper Band or breaking below the Lower band could signify a selling or buying opportunity respectively.
However this is not always the case. During a strong uptrend, there may be repeated instances of price touching or breaking through the Upper Band.
Each time that this occurs, it is not a sell signal, it is a result of the overall strength of the move. Likewise during a strong downtrend there may be repeated instances of price touching or breaking through the Lower Band. Each time that this occurs, it is not a buy signal, it is a result of the overall strength of the move.
Bollinger Bands have now been around for three decades and are still one of the most popular technical analysis indicators on the market. That really says a lot about their usefulness and effectiveness.
When used properly and in the proper perspective, Bollinger Bands can give a trader great insight into one of the greatest areas of importance which is shifts in volatility. Traders should of course be aware that Bollinger Bands are not unlike any other indicator in the sense that they are not perfect. A shift in volatility does not always been the same thing. Knowledge of the causes of these things comes from experimentation and a great deal of experience. Bollinger Bands should be used in conjunction with additional indicators or methods in order to get a better understanding of the ever changing landscape of the market.
Ultimately the more pieces of the puzzle that are put together, the more confidence should be instilled in the trader. When using this strategy, the lower band and upper band act as the support and resistance respectively. When used near historical support and resistance price level, this method will work even better. When using Bollinger Bands in conjunction with pattern recognition, your probability of success will greatly increase because the band itself is an indication of support and resistance.
The higher the price moves towards the upper band, the more overbought it has become. A double top that happens here will have high probability to reverse an uptrend into a downtrend. The lower the price moves towards the lower band, the more oversold it has become. A double bottom that forms here will have high probability to reverse a downtrend into an uptrend.
Personally, if I see a double top or double bottom that appears in the middle of the Bollinger Band, I will usually not take the trade, because it happens in the middle of nowhere.
You will find it in the indicators menu for most of your charting packages out there. The RSI is a technical momentum oscillator that measures the speed and change of price movement. In other words, The RSI measures the strength of price movements. It is classified as an oscillator because it oscillates between the values of 0 to , with above 70 being overbought and below 30 being oversold.
The RSI tool typically comes with a default setting of periods, although you can adjust the parameters in order to fit into your overall trading strategy.
For the method that I am showing today, the default setting works just fine. When price is near the lower band and the RSI makes continuous higher lows, this is a sign of price reversal towards an upward movement. When price is near the upper band and the RSI makes continuous lower high, this is a sign of price reversal towards a downward movement.
In order to understand this, you will first imagine the support level as a cushion. When the price came down in a downtrend and hit onto the support level, the first initial low was made by RSI indicator. When price tested the support level for the 2 nd time, RSI made a higher low than the previous one. The third and last method that I am showing today is the Bollinger Bands with engulfing candles method.
If you search the internet, you may come across many different ways of defining an engulfing candle. Exponential moving averages are a common second choice. Bollinger registered the words "Bollinger Bands" as a U. The purpose of Bollinger Bands is to provide a relative definition of high and low prices of a market.
By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. In Spring , Bollinger introduced three new indicators based on Bollinger Bands. Bandwidth tells how wide the Bollinger Bands are on a normalized basis.
Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:. Uses for bandwidth include identification of opportunities arising from relative extremes in volatility and trend identification. The use of Bollinger Bands varies widely among traders.
Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. When the bands lie close together, a period of low volatility is indicated. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action.
In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In , Lento et al.
The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.