In day trading we need an indicator that helps us quickly spot the trend direction, trend reversal, and monitor volatility. That, way we can capitalize on the situation and gain profit from it. One of the available technical indicators available is Bollinger Bands. With the right techniques to use Bollinger Bands in day trading, traders will gain a huge amount of profits.
Ways to Day Trade Uptrend Using Bollinger Bands
With Bollinger Bands traders can assess the level of an asset price is rising (uptrend). Besides, it also helps traders to know the moment when it potentially loses its strength and starts reversing.
These are the techniques to use Bollinger bands in uptrends
- During the strong uptrend of a particular asset price, it will run along or touch the upper band when the impulse waves higher. If that does not happen, then the uptrend starts to lose its momentum.
- There is pullback during the uptrend prices. That is when the price drops for a period of the trend. This is normal. Usually in the uptrend, when it moves strongly, the pullback lows will happen, normally, near or slightly above the middle line (the moving average). It does not have to stay in the middle line. But, once it does, then the pullback is strong.
- During the strong uptrend, the price should never touch the lower band. If it touches the lower band, then there will be a reversal, soon.
Ways to Day Trade Downtrends with Bollinger Bands
Bollinger Bands also help trades assess the level of falling asset price and when will it gains back its strength.
These are the techniques to use Bollinger Bands during the downtrends.
- If the asset price is in a strong downtrend, then it may run along or touch the lower band when the impulse waves lower. If that does not happen, the downtrend may start to lose its momentum.
- During the downtrend, there is still a probability of the price to rally several times. The pullback high happen when the price moves strongly lower.
That happens around or below the middle line (the average line). There is a selling strength if the pullback stalls out around the middle line.
- If there is a strong downtrend, then it should never reach the upper band. If that happens, then there must be a warning sign of a reversal.
Ways to Spot Trend Reversal with Bollinger Bands
Here is how you can spot trend reversal with Bollinger Bands.
- During the price uptrend, when it continuously hit the upper band and it hits the lower band, then that is a signal of reversal. Once the price rallies again, the possibility to reach the recent price is high.
- During the downtrend, when the price continuously hit the lower band and hits the upper band, that is a signal of reversal. Once the price declines again, the possibility to reach the recent price is low.
However, you cannot use Bollinger Bands as a stand-alone trading system, you need to use it along with two or three other un-correlated indicators.
Writer: Lisa Ramadhani