The Bollinger Bands can be used along with the Stochastic Oscillator to generate very interesting signals that are very accurate. By using two indicators to confirm the trade entries we can get very high win rate.
The way to trade this system is using the lower band\upper band to gauge the location of price. When price is near the lower band it is a sign that price is near a support level, and it will probably go upwards. When price is near the upper band it is near a resistance level and therefore should go downwards.
Long Trade – When price touches the lower band and the Stochastic Index crosses the signal line upwards.
Short Trade – When price touches the upper band and the Stochastic Index crosses the signal line downwards.
Stronger Long Signal – When price touches the middle band + the middle band is trending up + Stochastic Index crosses the signal line upwards.
Stronger Short Signal – When price touches the middle band + the middle band is trending downwards + Stochastic Index crosses the signal line downwards.
The advantage of the stronger signal is that price bounces off the middle band (which is the 20-SMA), and this is a strong retracement signal. We will enter this sign even if price does not touch the middle band or just come closer, and then bounces back in the opposite direction.
The power of the system is in the fact that it enters both trending and ranging signals, so even if the trend stops you can still enter trades and generate profits from the markets. The first two signals are for ranging markets so we enter at the lower and upper bounds of the range, and the latter signals are for trending markets.
By using them we can join the market at tactical points just before the trends continue strongly, and we gain high profits.
We recommend placing the stop loss at swing low for long trades, and at swing high for short trades.
This means that for long trades place the stop loss 2 pips below the lowest low of last 4 bars, and for short trades place the stop loss 2 pips above the highest high of last 4 bars.
This method keeps your risk to minimum and keeps your Risk:Reward ratio high.
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