List of Market Conditions for Using Bollinger Bands
Bollinger Bands are used as a technical indicator, that help retail traders read stock charts more easily. The Bollinger Bands indicator is a Channel Indicator. Channel indicators are lines that are drawn by the computer software program, above and below the price on the chart. The difference between Bollinger Bands and other channel indicators, is that Bollinger Bands expand and contract with the dimensions of the candlesticks or bar chart price.
Oftentimes, a beginner who is just learning how to read charts has a difficult time seeing sideways price action, and when a compression pattern is forming. Compressions are important technical patterns to recognize early, because these tight price patterns end with a sudden velocity or momentum run up or down.
By using the Bollinger Bands indicator which consists of a line above and below the candlesticks on the price chart, compression patterns are easier to see so that a retail trader can prepare in advance for the breakout move.
A breakout move is when price suddenly moves out of the tight sideways pattern, and runs up or down many points. Bollinger Bands are the best channel indicators to use due to their unique way that the bands expand and contract with price.
When the Bollinger Bands indicator becomes narrow, this is indicative of a compression of price with the potential for a big price move. The tighter the Bollinger Bands are the more momentum is likely to occur.
Bollinger Bands can be placed on price charts, candlesticks, volume bars and other line indicators. When using Bollinger Bands do not also use moving averages or regression lines indicators on the chart, as this will make it harder to read and identify the Bollinger Band compression patterns.