Bollinger band is a helpful analytical chart that traders from various markets use to identify volatility, define a trading range, and determine the breakout prices for a stock. Although Bollinger bands can give a trader valuable insight into trends, they are not always accurate, and hence it’s always good to use them with other indicators.
You could use several indicators alongside Bollinger bands to make accurate inferences about price breakouts and trend reversals. Some of these include BBTrend, %b, and Bandwidth. To know which one is best for you, you need to understand how each indicator works with Bollinger bands.
Types of Indicators
Indicators are divided into three classes,
- Volatility indicators
- Momentum Indicators
- Trend Following Indicators
A trader should understand which indicator belongs to which category to combine them to enable them to make better trading decisions. Traders who do not know the best way of combining indicators create confusion, wrong price interpretation, and wrong trading decisions.
Bandwidth is the width between the simple moving average and the lower and upper bands. Traders use Bandwidth to identify low volatility, which is indicated by a narrow width known as the Bollinger squeeze. When the upper and lower bands squeeze the middle line, traders use this as a signal that volatility will soon increase.
Combining insights from the bandwidth indicator with other signals such as accumulation/distribution indicator can give a trader an accurate direction of an impending breakout. When the price of an asset registers a downward trend while the indicators head up, then the sign is bullish.
Unlike other indicators, the BBTrend indicator signals both the direction and strength of trends. This quality, therefore, makes it a valuable tool for traders. A BBTrend that reads above zero signals a bullish trend, while one that reads below zero indicates a bearish trend. Traders use the BBTrend indicator to determine the momentum behind a trend by measuring the degree below or above zero.
This indicator plots the closing price of a stock as a percentage of the upper and lower bands. The lower band is 0; the simple moving average is 0.5, and the upper band is +1. The %b indicator thus shows how close the stock price is to the three bands, which enables traders to identify points when a price will jump a band. It also allows them to determine trend changes.
How to Combine Indicators
Traders who do not clearly understand the category that indicators belong to often combine indicators from similar categories. So instead of complementing each other, the indicators give identical results. This redundancy misleads traders to put too much emphasis on the information provided and miss out on information that could give them better returns or keep them in the trade.
A good combination of indicators has an indicator that identifies and measures momentum like the RSI, an indicator that finds trends like ADX, and one that measures volatility, such as Bollinger bands. A good combination does always need to involve indicators from the three categories. Understanding the right indicators to combine under each trading circumstance is very important.
Here are a few combinations that you could explore to make trade better;
- You could opt to combine RSI, moving averages, and standard deviations to establish profit targets after pullbacks.
- Combining CCCI, a momentum indicator, and ATR is a volatility and Trend indicator to estimate how far prices will travel after a retracement.
- You could also use Williams % as a momentum indicator, MACD as a trend indicator, and Keltner Channel, a volatility indicator for trend following and breakout.
Combining indicators that complement each other by calculating different measurements based on the same price action and then combining the analyzed information with studies from your chart will positively impact your trading.
One of the most powerful analytical tools that a trader could use is the correct technical indicators. Understanding the category of each indicator and identifying indicators that complement each other is valuable for all traders.
However, it is also important to note that although a combination of indicators provides traders with valuable insights, there can never be a guarantee that various indicators will give signals that are 100% accurate all the time. Traders should therefore apply necessary risk management strategies even when trading with combined indicators.