technical analysis

Basic Guidelines for Trading

  • When identifying trading opportunities traders should follow two basic guidelines:
    1. Identify the direction of the trend
      • In an up-trending market, look to buy
      • In a down-trending market, look to sell
    2. Identify the right times to buy or sell
      • One way to do this is with Bollinger Bands

Bollinger Bands

  • A technical indicator that utilizes a combination of simple moving averages which can help a trader compare volatility and relative price levels over a period of time.
  • The outer bands are often used to help traders time an entry or exit point for a trade
  • The default settings in most charting packages will have the outer bands two standard deviations away from the 20 period SMA line found in the middle
  • To increase the reliability of the signals the setting can be changed to three standard deviations
  • Standard Deviation is a calculation used in statistics to measure volatility
  • Therefore as price action approaches the outer bands, which can be considered more extreme price levels, traders often anticipate the price-action will reverse around these extremes and move back towards more natural levels.
  • Thus the outer bands are often used to identify entry and exit points
  • Traders also use Bollinger Bands to note a potential break-out situation
    • As the market trades in a range-bound situation the bands will move close together
    • The closer they print, the higher the likelihood of a breakout
    • While this indicator does not tell us the direction of the breakout, just being aware of the possibility can help the trader