Sunday, September 9, 2007

Bollinger Bands - An Essential Tool For Bigger Profits

If you have read our article on standard deviation of price you will understand why this concept is essential for all traders and a great way of applying the theory is the Bollinger band.

Bollinger bands are simple to use and are available free on many chart services on the web and will give you a greater insight into market movement and trading for profit.

Lets look at them.

Bollinger bands will help you how to do the following.

1. Predict big trends

2. Spot trend changes

3. Time market entry with greater accuracy.

What are Bollinger Bands?

Bollinger bands are volatility bands drawn around a simple moving average in the center giving you three lines in total.

Bollinger bands are calculated using the standard deviation of a price over the exact same period as moving averages and plotted as lines above and below the moving average.

Moving averages are used to identify the underlying trend and are the middle band.

Bollinger bands then combine this moving average with the volatility of the individual market to create a trading envelope the standard deviation.

The distance between upper and lower Bollinger bands simply give you the volatility of the market traded. The greater the distance the upper and lower bands are the more volatile price of the market traded is.

Bollinger Bands Work

In any market, traded the price rises slowly over the longer term. Prices may become volatile in short periods of time, but will normally come back to the longer term moving average which is defined by the centre band.

The center band thenormal value of the market traded that people are used to paying over time i.e it reflects the supply and demand fundamentals.

The volatility of the outer bands shows how volatile prices are and how far away price is from normal value. Short term price spikes tend to be short term and are normally caused as much by trader psychology Bollinger bands can therefore help with the following.

1. Spotting New Trends

When a market makes trades in a narrow range, the Bollinger bands are also narrow and close to the central band this shows a market with low volatility.

This can be a warning that a trending move is about to start.

When prices break above or below the upper or lower band, a signal is given that a trend is about to develop and a trader will go with the break.

2. Timing Entry Levels

The Bollinger bands can when a trend has started help you get into the trend with good risk to reward on a price retracement.

Look for pullbacks to the center band and enter in the direction of the trend.

3. Market Turning points

When the price touches the top of the Bollinger band and pauses a return to the middle band is on the cards (especially in the short term) as prices have moved to far to quickly.

If the price touches the bottom of the Bollinger band and momentum does not follow through the opposite scenario is in place i.e. a buy signal.

Bollinger bands are a great tool not only for warning of a trending move but they will also help you time trades within the existing trend and even help you generate short term sells and buys within the prevailing trends (very useful for swing traders).

Standard deviation of price as a concept of price works and the Bollinger band helps you put the theory into practice.

As with all indicators it does not work all the time and needs to be combined with other tools.

We favor simple trend lines and the best momentum indicator of all - the stochastic indicator which will help you filter out false signals.

Check out Bollinger bands and get a deeper insight into market movement and you will find once you use them you wont trade without them.


On all aspects of becoming a profitable trader including info articles, free systems and PDF downloads and an exclusive Gann Trading Course visit our website at

5 Steps To Becoming A Stock Market Guru

It has occurred to me that many of the readers of this article may be interested in a career change. If so, I suggest that becoming a stock market guru may be worthy of your consideration. It's a job that -- if you follow my advice -- pays extremely well, doesn't take much your time, requires almost no experience, and can potentially bring you fame and fortune.

I have been observing market gurus for many years and have noticed that there are certain traits that the successful ones have in common. So to get your new venture off to a roaring start, I'm going to tell you exactly how to be successful as a stock market guru.

  1. First of all, you must do something to get the attention of the financial media. The way to do that is to make extreme predictions. No "the market is going up 10%" or "down 5%" kind of forecasts. You have to say things like "the Dow is going to 36,000" or "button down the hatches, the market is going to crash any day now."

    The best way to decide whether to be bullish or bearish is to measure the mood of the public. You will be much more popular if you're wildly bullish at market tops or wildly bearish at market bottoms. You want to tell people what they're already predisposed to believe.

    Also, you can never change your mind. The media doesn't like that. So be a perma-bull or a perma-bear. But whatever you do, never, ever waver from your original stance.

  2. After you have decided whether you want to make a living being extremely bullish or extremely bearish it is very important that no one remembers when you first made your original prediction. This one is going to be tricky and requires some skill. Don't ever let anyone pin you down on timing issues. The way to do that is to just keep repeating your prediction over and over again until everyone forgets how long you've been making the forecast.

    For role models, watch the politicians. They are experts at not allowing anyone to pin them down on anything that they prefer you not to remember.

  3. You must repeat your market prediction loudly, often, and with extreme confidence. When the market goes against you, simply keep repeating that you're very confident of your stance and you have no doubt that the market will go your way very soon. Again, you must make people forget about timing issues and the best way to do that is through repetition.
  4. The market will eventually go your way. It may take years, but it will happen. Now listen closely -- whenever the market finally goes your direction, no matter how small a move it is, proudly declare victory. I mean shout it from the roof tops. You were right all along and it's all because of your astute analysis.

    Do not make any mention of when you first made your original market call. If you are cornered and you must make a comment about your entry point, just say that you have been averaging into your position for quite some time. That way no one will know that you actually lost a lot of money.

  5. Speaking of losing money, never follow your own predictions by investing your own funds. Otherwise, the income that you make as a famous guru will be taken away from you by the market.

Good luck in your new career. And when I see you on CNBC promoting your new book -- Boom Times Ahead: Dow 38,437 or How to Get Rich During the Coming Depression -- I'll know that you took my advice to heart.

Copyright 2005

Larry Holmes invites you to visit Your common sense guide for financial and investment success.