Add fizz to your trades by using Bollinger bands

THOUGH long term trends are relatively easy to identify, tracking intraday trends is often more tricky to do, as short term developments often disappear before you’ve even identified them or before they can be used to your advantage.

This is where Bollinger bands can serve as a useful tool for day traders. Whereas most indicators work better and smoother on longer timeframes because the irrationality of the market has time to work itself out over a multitude of bars, Bollinger bands are designed for the express purpose of profiting on trends and their reversals and for tracking market volatility.

Developed by John Bollinger, Bollinger bands consist of a centre line of an exponential moving average and two price bands either side of it based on standard deviations of the stock being studied. The bands will expand as the stock becomes more volatile or contract if it becomes bound into a tight trading pattern.

When the stock price hovers around the upper band, the shares are thought to be overbought and when they stay near to the bottom band they are thought to be oversold, triggering a buy signal.

Tom Hougaard outlines the use of stochastics in his column on the right of this page. By using these techniques in combination with Bollinger bands, you have the ideal set up of technical indicators to find overbought and oversold territory. For example, when both the Bollinger bands and stochastic indicator curve up near a low, it is often a buy indication, and when the opposite occurs it is a strong sell signal.

By using these techniques you should be able to better identify intraday trends and profit from them once you have done so.