Using Bollinger Bands to Help With Trading Stocks Successfully

While a background in statistics would always help, not every investor will need such in-depth knowledge to know when to buy and sell securities. In fact, most discount brokerage accounts now provide traders with even the most basic technical analysis… and for traders who do not have access to such features, Yahoo! Finance under its “Charts” link can provide anyone with enough analysis to help make a trading decision.

One of the most obvious and basic technical analysis tools that a trader will want to use when trying to make trading decisions is the Bollinger Bands overlay. This tells investors whether a security price has been trading too high or too low based on volatility levels. In more advanced charts, plotting a moving average will help define “too high” and “too low,” but in some cases it is not all that relevant anyway.

When The Price Is Too Low

Investors who are anxious about establishing a position in a particular security like to see that their security has been trading closer to the lower Bollinger Band (the gray line at the bottom). Ideally, the security should be trading on or below the line, signalling quite clearly that the security has been over-sold.

A word of caution: do not base trades solely on the Bollinger Bands. If the underlying fundamentals suggest that there is a non-systemic reason for the security price being oversold, then it does not matter where that security is trading; it is heading down (e.g. Citigroup in 2007-08, General Motors in 2007-08 and so on).

When the Price is too High

Likewise, when a security’s price is trading closer to the upper Bollinger Band, then chances are quite high that it will correct and trade closer to the moving average or right between the two bands at some point in the near future. When shares trade this close to the upper band, it is more prudent to sit tight and wait for the bands to either normalize in a steeper upward trendline or for the security to correct. Buying at the upper band is a risky proposition.

Even if there are underlying fundamentals to support the strong buying trend in the security the Bollinger Bands will respond by trending upward. The riskier the situation, the wider those bands will become, therefore waiting for the bands to narrow is a more prudent thing to do.

Summary

Bollinger Bands and the moving average together are never to be used in isolation. Investors are always wise to investigate underlying, fundamental data before taking any position in a security, however shorter-term trades can often be made based on this technical data. For a steadier approach, investors are always encouraged to review and digest as much technical and fundamental information as possible.

–>Learn Investment Strategy the way the Pros do it at MutualFundSite.org.

Chris has more than 17 years of financial services experience as a Financial Advisor. He currently manages a Debt Blog at HowToRepayDebt.com.

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A Breakout Trading Strategy For Big Profits

Proper use of technical analysis will give you a huge advantage in the world of trading or investing. I use technical and fundamental analysis in my overall trading plan. This puts as many factors as possible in my favor before taking a position in the market.

Today, I will talk about a tactic called “Channel Range Breakout Trading”. With this strategy, you use momentum to your advantage. A position in the market is only taken after the price moves out of a trading range.

A good example would be a stock trading in a price range of 19-22 dollars per share for 3 months. Every time the price went down to around 19, it rebounded, and every time the price went up to about 22, it pulled back during this 3 month time frame. If the stock price breaks above 22, on heavy volume, you would want to go long. If the stock price breaks below 19, on heavy volume, you would want to go short. Many times it would be wise to wait for a close, above or below, the 3 month trading range before entering into a position.

Important principles concerning this breakout strategy include, the longer the sideways price channel, the more important the breakout. The closing price of the day or week gives added weight, because it tells you if buyers or sellers are in control at the end of this time period. Two or more closes out of the original trading range give more credibility to the breakout, and shows that momentum is more solidly on your side. It is also important to identify key support or resistance levels from a daily, weekly and monthly time frame.

This is only one of many trading strategies, when implemented properly, can make you a lot of money. Always remember to keep your losses small when the market goes against you. Also, let your profits run, which means to stay in a winning position until solid evidence tells you to get out.

Gary E Kerkow is the founder of Tradingmarkets4u.com. This site provides information to help traders and investors become successful. Kerkow has over 20 years of trading experience including stocks, futures and options. He implements the strategies, methods, techniques, principles and psychology of the world’s best traders and investors. This includes Jesse Livermore, William J O’Neil and others. Visit my website at http://www.tradingmarkets4u.com.

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