Bollinger Bands and MACD

Mon Feb 22, 2021, 08:04 pm | by Alexis Jurcak | No comments

Today Ryan Faloona and Johnathan Mallard discuss how to use Bollinger Bands in Benzinga Pro for trading and what type of signals they produce. 

Reading Bollinger Bands

If you are someone who may be new to learning about Bollinger Bands, you may not even know what you’re looking at. To begin, the Bollinger Band indicator is contained within the two yellow lines. so, that shaded area within those two yellow lines is what you’ll generally use to make trading decisions. This shaded area is referred to as the “channel.” The red and yellow lines in the middle are great for indicating when to exit and enter trades, as well as, where to set your stop-loss.

The red line represents the moving average. If you were to click on the cogwheel for this particular indicator you can see the inputs affecting this. 

You will see “length” which indicates the moving average. For this example, we have a 20 exponential moving average. The “mult,” or multiplier, represents standard deviations away from the mean. You may be thinking that this is similar to a Keltner Channel. However, Keltner Channels don’t work off standard deviations, they are actually calculated based on their average true range. 

So, what does this all mean? In practice, a Bollinger Band indicator expands much more rapidly than it would on a Keltner Channel, in terms of period of volatility. 

Using recent Apple activity as an example, when you see price action moving back and forth as such, using the Bollinger Band indicator may not be your best tool for determining a valuable trade. 

However, if you go back in time a bit, you can see that the Bollinger Band works quite well in a downtrend. When the price stays below the bottom band or stays above the upper band that indicates that there is still time for you to be in that trade. So with that being said, there are a couple of things you can do here: 

  1. As soon as you see price break beneath the bottom band you can aggressively get in the trade until it regains that band. 
  2. Or, once it’s within the channel itself (the shaded area), you can still play this trade to the downside, but you’ll want to make your stop somewhere along the median area versus the bottom line. Once a trade is inside the bands, it poses a less aggressive position, but that doesn’t mean it’s a bad trade. 

How to Use Bollinger Bands for Profitable Swing Trades

A common way that many traders use Bollinger Bands is if they’re swing trading

Still using Apple as an example, you see a reversal on March 23rd. The screenshot above shows a strong candle on April 6th in terms of price action. On that day the candle opened at $62.73, right above the median line; and it closed at 65.62, way away from the median line. If you were to buy at $65.60, the next thing you’ll do here is to watch this trade until you get a candle that closes below the median line. 

Now, that doesn’t happen until July 23rd. Even with several months of a swing trade if you’re following the rules of the Bollinger Band, you’ll have an easy and successful swing trade, without having to do too much monitoring and worrying. This example represents exactly the type of setup you want to be in. 

The volatility is low and the price continues to climb over the next several months. But they aren’t drastic swings. For the most part, you don’t want drastic swings when using Bollinger Bands because the channel within the Bollinger Band remains tight without expanding. 

Here you can see a closing price of $96.19 and an open of $102.88, gapping up $5.00. When something like this happens you can see the channel widening because it’s using a standard deviation. As you look further on the band, the longer the price consolidates, the smaller the actual band gets. It’s said that the longer something consolidates the more violent the trade is going to be, whether it be up or down. 

When to Exit Using Bollinger Bands

You can exit either at the median line or at the top of the channel. But, this depends on how volatile the stock is as well as what your trading plan is. For example, if you’re planning on taking a more aggressive, short-term trade, using the top band may be where you want to exit instead of waiting for price to come back to the median. That way you won’t miss out on profits.

Using Bollinger Bands for Intraday Trading

Bollinger Bands aren’t just great indicators for swing trading but also for intraday trading.  

For example, you can see a reversal towards the top of the band and a breakthrough at the median, that’s where you’re going to want to enter. If you’re playing this on the downside you’re waiting for a breakthrough at that median and waiting for it to come back into that median price. 

Additionally, you can see how this correlates with the MACD. MACD stands for moving average convergence/divergence. As the stock moves away from the moving average, the divergence grows on the downside. As the stock starts to come back into the moving average, the divergence shrinks and moves towards the zero level. You can use both Bollinger Bands and MACD to confirm your entry and exit points. 

Final Thoughts

Ryan and Jonathan presented a very solid foundation for using Bollinger Bands to make successful trades. Again, every trader and their portfolio differs from one another, so what works for one person may not work for another, and vice-versa. Using Bollinger Bands can help you determine your best entry and exit points to get the most successful swing trades. In addition to using the Bollinger Bands, you can correlate the information from that indicator to the MACD indicator to solidify exactly where to enter and exit.

Are you ready to utilize Bollinger Bands and MACD in your next trade? Start your free, two-week trial of Benzinga Pro today!