Bollinger Bands are a good visual way to identify and analyze trending markets.
Figure 5 – Price behavior of the Euro-Dollar during trending periods.
Trending Patterns and Continuation Signals
- In general, during an upswing, the price will stay within the upper band and the central moving average. See November and December in Figure 5.
- During a downswing, the price will stay within the moving average and the lower band. See January in Figure 5.
- Prices that close above the upper (or below the lower) band are not reversal signals, in fact subsequent closes above the upper (or below the lower) band are a sign of trend continuation.
- In this way, prices can “ride” the upper band during an uptrend, or the bottom band during a downtrend.
In figure 5, the period from October through January is a clear example of the price action “riding” the upper band during an uptrend.
Reversals
- A trader should wait for the price to turn in the opposite direction after touching one of the bands before considering that a reversal is happening.
- Even better one should see the price cross over the moving average.
In figure 5, these indications of trend reversal are marked as red arrows. Also notice, how in mid-December, a trader following these two guidelines would have closed his position (because of market noise) earlier then the actual top to the market, but not by much.
