Bollinger Band Trading - Some Rules to Follow
The upper and lower bands act as dynamic support and resistance for the underlying asset.
If the price action of the stock moves outside the Bands on the first or second day of a breakout, it suggests that the move is likely to continue.
If the price action of the stock moves outside the Bands AFTER the first or second day of such a breakout, it is a good idea to exit a trade if you're already in one, because at this point a reversal is more likely.
Following a breakout, if the price bars/candles are sliding along either the upper or lower bands, it indicates that the stock price action is moving effortlessly in one direction and likely to continue that way.
The best time to take profits is when the Bands are wide and the price of the underlying has moved in your favour. Don't wait for signals that the move is stalling.
The moving average between the bands can act as a support and resistance line.
When the price of the stock, forex pair or other underlying asset is above the moving average (MAV), it is likely to stay there. So we watch for definite "breaks" above or below the MAV.
As price volatility rises the Bands will begin to widen. As it falls, they will squeeze in together. Options traders should employ buying strategies when the Bands are tight and selling strategies when they are wide. Quite often, your entry signals will be evident before price volatility rises.
After entering a long options position, maximum profits are achieved once the price bars or candles move outside the widened Bands. This is your ideal profit taking opportunity.
To help with the timing of your entry, use the Moving Average as a support and resistance line, as well as the upper and lower Bands as an indication of volatility levels and the strength of the move.
Finally . . .
Remember that this indicator is a guide only. It cannot predict future volatility of price action. It simply reflects the historical and current volatility of the stock at any given time. Do not place a trade based on this indicator alone. It should be used only in conjunction with your other entry signals. The function of Bollinger Band trading is to enhance your profits, not to determine them.