Market Conditions and Bollinger Bands
Bollinger Bands
are used as a technical indicator, that help Retail Traders read stock charts
more easily. They are a channel indicator. Channel indicators are lines that
are drawn by the computer software program, above and below the price on the
chart. The difference between Bollinger Bands and other channel
indicators, is that they expand and contract with the dimensions of the
Candlesticks or Bar Chart price.
Often times, a beginner who is just learning how to read
charts has a difficult time seeing sideways price action, and when a
compression pattern is forming. Compressions are important technical patterns
to recognize early, because these tight price patterns end with a sudden
velocity or momentum run up or down. By using Bollinger Bands which are
a line above and below the Candlesticks on the chart, compression patterns are
easier to see so that a Retail Trader can prepare in advance for the breakout
move.
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A breakout move is when price suddenly moves out of the
tight sideways pattern, and runs up or down many points. Bollinger Bands are
the best channel indicators to use due to their unique way that the bands
expand and contract with price. When these bands become narrow, this is
indicative of a compression of price with the potential for a big price move.
The tighter these bands the more momentum is likely to occur.
These bands can be placed on Price charts, Candlesticks,
Volume Bars, and other line indicators. When using them do not also use Moving
Average or Regression Line Indicators on the chart, as this will make it harder
to read and identify the Bollinger Band compression patterns.
These are a wonderful channel indicator. However the bands
cannot tell the Retail Trader which direction price is going to move. Therefore
traders should use additional indicators such as Volume, Dark Pool Large Lot,
Hybrid, and Quiet Accumulation/Distribution Indicators as well. These will
reveal whether the price is going to break to the upside or the downside. By
incorporating other directional indicators, Bollinger Bands analysis
improves success for most Trading Styles.
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Keep in mind that Bollinger Bands, are designed for
sideways Market Conditions. There are 6 primary Market Conditions in the
automated marketplace, and the bands work best for Platforming, Consolidating,
Bottoming or Topping, and Moderately Trending Conditions.
They are not ideal during Velocity or Trading Range Market
Conditions as the price action distorts them resulting in patterns that are
extreme, and the bands do not react properly to the price fluctuations.
These bands are becoming a popular indicator for many types
of traders who depend on breakout patterns to trade. Keep in mind that during
certain Market Conditions they will stay close to the highs of Price or the
lows of Price, but that is not an exit signal. This happens when the bands are
defining the momentum energy during a Moderately Trending Condition.
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Summary
Retail Traders who struggle to read Price and Trend on
charts will find them useful and helpful. Some traders however find the bands
distracting. Using Bollinger Bandwidth as an alternative to Bollinger
Bands on Price, is a good option for many Retail Traders who do not like
their Price and Candlesticks cluttered with lines.
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Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
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