Bollinger Band Trade Signals
Here are a couple of ways the Bollinger Bands can signal a trade entry point.
The Bollinger Band squeeze can be an indicator for a pending price breakout. Look for the bandwidth to steadily narrow, indicating reduced volatility. When the price starts to break out at the upper or lower band, enter a trade in the direction of the break. The price will break out of the Bollinger Band squeeze with a strong price move in one direction.
Another trade indicator, especially for stock traders, is a trend reversal from a bottom band breakout. If a price bar or candle moves strongly through the lower band, this can be an indicator of a oversold situation and the price could poised for an upward move. Band breakouts are signs of a possible reversal in both directions, but the lower band breakout for stock prices seems to have the most validity.
The SMA line can be used as an indicator to close an open trade. Once a trend has developed, the price will often stay between the SMA and the upper or lower band, depending on whether the trade was initiated long or short. A price move back across the SMA may indicate an end to the price move.
The Bollinger Band indicator be used with other technical indicators to help confirm buy and sell signals. Using the bands on a candlestick chart is a popular combination. Traders will look at the banks to confirm the signals indicated by the candlesticks. Learning how to trade with Bollinger Bands can be a challenge but very profitable if properly maintained.