Bollinger Bands Complementing Technical Analysis Indicators

by Himanshu Jain
(Tokyo)

Bollinger bands are good when the market is not trending but can give an early indication of emerging trends. many times we just have Bollinger Bands on our trading charts even if we are not using these for our primary source of trading signals.

Bollinger bands can provide some good winning signals if used with other indicators/oscillators like Stochastic. let's see how to work with these combinations and what we should look for.

It’s always advisable to keep a track of the changing volatility and that's what Bollinger Bands indicate. The change in the volatility may indicate some major moves or breakouts and in such cases it is always better to be prepared to enter the market before it is too late.

What we need to look for in Bollinger bands is as follows:

1) Are the bands widening?: Widening of the Bollinger bands indicate that the market volatility in increasing. This indicates possibilities of further move in the ongoing direction. But before we take a position we should have confirmation of the current direction.

2) Are the bands tightening?: tightening of Bollinger bands indicate that the volatility is decreasing in the market. Is it the silence before the storm and is a major breakout on the way? If a major breakout is on the way then we need to check the possible direction of the breakout.

1-a) Bullish widening Bollinger Bands:

- The bands are widening with the upper band moving sharply upwards and the lower and moving sharply downwards.
- The price-action is moving upwards above the middle band.
- The recent candle sticks are longer than the previous candlesticks

Action:
- Check if RSI (Relative Strength Index) is in the range of 30 to 50 and rising.
- You may also check if ADX is rising towards 25 and/or beyond 25 and +DI line is crossing -DI line.
- Also check if Slow Stochastic is crossing the stochastic signal line upwards.
- With all the above taking place, we can expect a further upward movement. It will better to wait for 2 or 3 more candles to confirm the trend and then take a long (buy) position. There is always a possibility that before a further upward move, a downward correction may take place. The wait of 2 or 3 candles may help in increasing our profits if we can take a position during that correction and market moves as we expected. In case the market does not behave the way we expected and moves opposite, this wait will help in reducing the loss.

If ADX does not move above 25 then the upward move may be limited and hence the profit taking will be limited

1-b) Bearish widening Bollinger Bands:

- The bands are widening with the upper band moving sharply upwards and the lower and moving sharply downwards.
- The price-action is moving downwards below the middle band.
- The recent candle sticks are longer than the previous candlesticks.

Action:
- Check if RSI (Relative Strength Index) is in the range of 55 to 75 and is falling.
- You may also check if ADX is rising towards 25/beyond 25 and -DI line crossing +DI line.
- Check if Slow Stochastic is crossing the signal line downwards.
- With all the above taking place, we can expect a further downward move. It will be safer and hence better to wait for 2 or 3 more candles for confirmation of the trend before taking a short position. It also happens that before a further downward move there may be some upward correction and to wait for 2 or 3 candles may help in increasing the profits or reducing the losses if we can enter during the correction, as mentioned in point 1-a.

If ADX does not move above 25 (market not trending) then the downward move may be short-lived and hence the profit taking will be also be limited.


2-a) Bullish tightening Bollinger bands:

The pattern happens with a prolonged sideways move with less volatility (short candlesticks)

- Check if there are minimum 2 continuous bullish candlesticks (green) which are longer than previous 2 to 3 candlesticks.
- Check if Relative Strength Index (RSI) is in the range of 30 to 50 and rising.
- You may also check if ADX is rising towards 25/beyond 25 and +DI crossing -DI.
- Check if Slow Stochastic is crossing the signal line upwards.
- If all above are taking place then we can expect an upward breakout. It will be safer and hence better to wait for 2 or 3 more candles for confirmation before taking a buy position with a red candle.

If ADX does not move above 25 (market not trending) then the upward move may be short-lived and hence the profit taking will also be limited

2-b) Bearish tightening Bollinger bands:

The pattern happens with an extended sideways move and also with volatility being less (short candlesticks).

- Check if there are minimum 2 continuous bearish candlesticks (red) which are longer than previous 2 to 3 candlesticks.
- Check if Relative Strength Index (RSI) is in the range of 40 to 60 and falling.
- You may also check if ADX is rising towards 25/beyond 25 and -DI crossing +DI.
- Check if Slow Stochastic is crossing the signal line downwards.
- If all above are taking place then we can expect a downward breakout. It will be safer and hence better to wait for 2 or 3 more candles for confirmation before taking a sell position with a red candle.

If ADX does not move above 25 then the upward move may be limited and hence the profit taking will be limited.


3-a) Continuation of uptrend after correction

During an ongoing uptrend the price may reverse to the middle band or even towards the lower band.
- Check if Relative Strength Index (RSI) is in the range of 30 to 50 and rising.
- We can also take a note of ADX to see if the ADX is above 25 and +DI line is over -DI line.
- Check if Slow Stochastic is over the signal which indicates a bullish configuration.
- With all the above we can expect the continuation of the ongoing uptrend. It is safer and better to wait for 2 or 3 more candles to have a confirmation that the recent opposite move was just a correction and then take a buy position

3-b) Continuation of downtrend after correction

During an ongoing downtrend the price may reverse to the middle band or even towards the upper band.

- Check if Relative Strength Index (RSI) is in the range of 55 to 75 and falling.
- We can also take a note of ADX to see if the ADX is above 25 and -DI line is above +DI line.
- Check if Slow Stochastic is below the signal line which indicates a bearish configuration.
- With all the above we can expect the continuation of the ongoing downtrend. It is safer and better to wait for 2 or 3 more candles to have a confirmation that the recent move in opposite direction was just a correction before taking a short position.

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