Spot Trends Easily Using Bollinger Bands

01/11/2012 3:00 pm EST

Focus: TRADING

Markus Heitkoetter

Author, Educator, Trader, and CEO, Rockwell Trading Services, LLC

Bollinger bands are great technical tools for spotting trends as they start and finish, says Markus Heitkoetter, who tells how he uses the bands in conjunction with other proven indicators like MACD and RSI.

We’re talking about using Bollinger bands today with Markus Heitkoetter. Markus, why is this one of your favorite indicators?

I think it’s a fascinating indicator to identify the beginning and the end of a trend, and here is how I do it. 

Many traders use Bollinger bands in a sideways market, but I actually like to use it to identify a trending market. You see, when the market starts trending—for example, to the upside—the upper Bollinger band will nicely point up in a 45-degree angle or more and prices will constantly touch the upper Bollinger band. 

It’s like a trend line above the prices, and this is how you can easily identify when a trend starts.   

And you like to use this in conjunction with some other indicators, right?

Right, the three indicators I like to use are Bollinger bands, MACD, and also RSI.

Bollinger bands and MACD are my primary indicators. I use MACD to identify bullish or bearish market conditions and I time my entries using the Bollinger bands.

See related: Demystifying the MACD Indicator

The RSI is just for final confirmation once I am in a trade to identify the strength of the trend. 

So, do you take overbought or oversold conditions into account when using the RSI?

Absolutely, but I use them in a different way. I actually want to see an overbought situation in a strong uptrend, because especially when daytrading, one might notice that the markets tend to stay above the value of 70—which indicates an overbought situation—for quite a while; for the next five to six bars. 

And is this an indicator one can use if considering shorting?

Well, yes, in the other way. If you want to short, you want to see that the RSI dips below 30. 

Now the RSI is great for identifying the end of the trend because especially when you’re short, once the RSI dips above the 30 level again, you know that the trend is over. So, when it is in the neutral zone between 30 and 70, it indicates the end of a trend.

Related Reading:

Related Articles on TRADING