If you’re a trader, then you are constantly searching for the best tools to help you successfully trade. If you haven’t yet heard about or tried to use Bollinger Bands and the Stochastic Oscillator indicator to aid in your day-to-day trading, then read on to learn all about this effective trading strategy.
Also referred to as just the Stochastic, works under the assumption that prices continuously move back and forth. What causes this movement is when the script is either overbought or oversold. The Stochastic was designed to measure the momentum of these script movements by indicating price shifts and calculating their value.
Working with a range of 100 percent, the Stochastic will indicate over-bought stocks at the 80 percent level while over-sold stocks fall in at 20 percent. This means that anything above 50 percent is considered a bullish market while anything below the 50 percent mark is considered a bearish market.
The momentum indicator has two lines. The first line, the Stochastic line, is symbolized by %K, which is calculated by subtracting the lowest low from the current close. The second line is symbolized by %D and is the simple moving average of %K.
Put simply, Bollinger Bands are the three lines on a script graph that indicate these three things about 95 percent of closing prices: the average line, the upper standard deviation, and lower standard deviation.
When you study the three bands, you will see that they, in fact, signal when to buy and when to sell depending on the standard deviations. It’s really that simple to use.
How to you use these 2 indicators together:
To enter a short or sell position, look for the following:
When the script breaks the upper standard deviation and,
When the bar or candlestick turn negative;
The script is thought to be overbought.
At this point, a short/sell position should be taken.
To enter a long or buy position, look for the following:
When the script falls below the lower standard deviation and,
When the bar or candlestick turn positive.
The script is thought to be oversold and
A long/buy position may be taken
Trades better suited for this strategy:
The best kinds of trades that traders should be looking for when using this strategy are quick, short trades, those that can be done in about ten to thirty minutes apart.
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