Bollinger band indicator is a very effective tool to find reliable trade setups. This indicator creates three simple bands which act as the support, resistance, and neutral trading zone. The upper band act as a critical resistance and the lower band act as the dynamic support. The mid-band is the neutral zone but we still can take our trades by using some advanced trading method.
Learning to use the Bollinger band indicator is not that easy. However, if you follow some strategic steps, you should be able to make a regular profit by using the Bollinger bands in the market. So, without any delay, let’s jump into the important market details.
Step 1, functions of the band
At the initial stage, you need to know about the functions of the band. The lower band should act as a strong support level but still, you should consider the slope of the mid-band. If the slope is negative, you should not consider the lower band as a strong support level. In general, the price tends to push below the lower band when the slope is negative. So, carefully assess the slope of the Bollinger band indicator before taking any trades in the market.
Step 2, using the neutral zone
The retail traders often take their trades in the neutral zone. But to trade the mid-band, you have to learn about price action trading strategy. Without having strong price action trading skills, you will never learn to find reliable trade signals. For instance, when the slope is positive, look for the bullish price action signals at the mid-band. Similarly, you need to look for the bearish price action signals at the mid-band when the slope is negative. Check here and learn more about the importance of price action trading strategy in the options market.
Step 3, determining the risk to reward ratio
After learning the basic art of trading, people start trading the Bollinger band for a small profit. At times they consider the mid-band as the potential profit target zone and ignore the basic functionalities of the risk to reward ratio. The minimum risk to reward ratio in the trades should be 1:2. If you ignore the simple rules, it will be a very tough challenge to overcome the major obstacles and you will keep on losing money. So, focus on this factor as it will determine how much money you are going to make in the options market.
Step 4, assessing the news
Being a new option trader, you should always assess the news factor even though you will be using the moving average indicator. At times you might have seen the mid-band of the Bollinger band changing its slope sharply. This is because high-impact news has changed the trend of the market. So, if you ignore the news data in the financial market, you are never going to learn to predict the trend change in the market. Moreover, it will become a very challenge to find reliable trade signals and thus you will be losing money most of the time.
Step 5, integrating with a strategy
You should not consider the Bollinger band indicator as a perfect tool to create a standalone trading strategy. You must use other trading methods and integrate the Bollinger band indicator to create a perfect trading system. It might take a while to integrate the Bollinger band indicator with the existing trading strategy but once you learn this technique, you should be able to trade this market with much more confidence. Focus on simple logic and try to integrate the Bollinger band indicator as a helping tool. Never rely too much on the indicator reading because if you do so, you are going to keep on losing money. Last but not the least, always be prepared to deal with few losing trades.