Learn about Bollinger Bands and Momentum combined here. Bollinger Bands are a technical indicator designed to give you a feeling for expected trading range, and whether prices are currently high or low in relation to that range. For that purpose, they take a 14 period moving average (middle line), multiply the standard deviation with two, and add (upper line) and subtract it from the moving average. This creates a channel prices are unlikely to break out of. The upper line works as a resistance level, the lower line as a support level.
The middle line can be both, depending on which site of the price it is on.
The momentum is an indicator for the energy prices have to move in a certain direction. When you are using candlesticks for your trading, as most traders do, every single candlestick will allow you to deduct the momentum for the period it represents. The longer a candlestick and its body are, and the shorter the wick is in relation to the body, the higher the momentum of the candlestick is. Vice versa, the shorter a candlestick and its body are, and the longer the wick is in relation to the body, the smaller the momentum of the candlestick is.
When you combine Bollinger bands and momentum you can deduct pretty sophisticated predictions about future price movements.
To understand how to do this, please take a look at this price chart:
As you can see, the asset, in this case the German stock index DAX, is moving in an uptrend and currently going through a reversal back to its main trend line.
This is a daily chart, and
Now, let us take a closer look at the last few candlesticks:
As you can see the Bollinger bands have given a pretty good indication about price movements in the past.
There are numerous examples for candlesticks reaching a Bollinger band, but then turning around, and closing underneath the resistance level or over the support level generate by the Bollinger bands.
Armed with that knowledge, take a look at the last candlestick in the chart, representing today’s price movements. As you tell from the long lower wick, the market first started to fall, but then turned around. It reached the middle line of the Bollinger bands and even crossed it a little. Judging by the market’s past reaction to hitting the middle line, which more often than not meant it would turn around, this is a good trading opportunity for using a No Touch or a Low option.
To figure out whether prices will obey the resistance line this time too, you can switch to a smaller time frame and use momentum analysis.
This is an hourly chart, meaning that every candlestick now represents the market movements of one hour. Therefore, today’s trading is now split up over the last few candlesticks (red rectangle). As you can see, prices started to fall with a lot of momentum today. After that, they rose with a lot of momentum. Then, which is about the range they got close to the Bollinger band of the daily chart, they ran out of momentum. They started to move up and down a little, but they gave no indication to rise any further.
By the second or third candlestick (red dot), this is a very strong signal that the market will obey the Bollinger band’s resistance line. You can therefore safely invest in a Low option or a No Touch option with a target price over the resistance line. Make sure to use an expiration date late this trading day, which also means to account for the different time zone.
On the other hand, if prices would have kept climbing with a lot of momentum, you should not invest in a Low or a No Touch option.
As you can see by the other price movements of the day, this would have been an investment you would have won easily. Combining Bollinger bands and momentum or any other resistance level with momentum analysis like in this example will generate a relatively secure strategy you can win a high percentage of your trades with.