In today’s trading world, the most widely used channel indicator is the Bollinger band. The Bollinger band indicator was developed based on simple moving average theory. The band consists of three bands of different moving average which provides the dynamic support and resistance to the trader for their entry and exit setup. Bollinger band trading is extremely profitable when price action confirmation is used in the dynamic support and resistance level.
Simple but profitable Bollinger Band trading:
Figure: Bollinger band trading with price action and stochastic oscillator
In the above figure, simple Bollinger band with 21 periods has been for trading. The upper moving average works as the dynamic resistance and the lower one acts as the dynamic support. These are our potential entry and exit point.
Trading the Bollinger band with stochastic oscillator and price action is extremely profit. At point A near the dynamic support, a bullish morning star candlestick pattern has been formed. This is a definitely a buy a signal but we will use the oscillator to improve the signal reliability. If the value of stochastic oscillator is 0-20 then it an oversold condition which means the market will shoot up any moment. So taking three confirmation we entered the trade.
Another classic sell trade setup is available in the above figure. At point B, a pin bar is formed just at the resistance level. Now we will again use the stochastic to filter the quality of trade. The stochastic value is in between80-100 which is an extremely overbought condition. A perfect sell setup for traders.
Stop loss and take profit.
Setting up the stop loss and take profit is pretty simple in Bollinger band trading. If we buy the pair then we will set our take profit at the resistance level. Those who are sellers can easily put the take profit in the dynamic support level. Stop loss should be put right below or above the confirming candlestick pattern.