Combining Inside Days with Bollinger Bands
Prices at the upper Bollinger Bands are considered high and prices at the lower Bollinger band are considered low. However, just because prices have hit the upper Bollinger does not necessarily mean that it is a good time to sell. Strong trends will 'ride' these bands and wipe out any trader attempting to buy the 'low' prices in a downtrend or sell the 'high' prices in an uptrend. Therefore, just buying at the lower band and selling at the upper band is out of the question. By definition, price makes new highs in an uptrend and new lows in a downtrend, which means that they will naturally be hitting the bands. With this information in mind, our filter will require that buy signals occur only if the candle following the one that hits the Bollinger band does not make a new high or low. This type of candle is commonly known as an inside day. The best time frames to look for the inside days are daily charts, but this strategy can also be used on hourly, weekly and monthly charts. Combining inside days with Bollinger bands increases the likelihood that we are only picking a top or bottom after prices have hit extreme levels. As a rule of thumb, the longer the time frame, the rarer the trade will be, but the signal will also be more significant.
Today we have a copy book set up of an Inside Day with Bollinger Bands.
Two ways of trading this set up.
1. Go long stop to be placed 10 points below yesterdays low of 4765. First target 5133.
2. Wait for a breakout above 4875 and go long. Stop for this is ideally the low of previous candle which is 4765. Unfortunately the stop is 100 points hence this set up does not have a good risk reward.
Will Go long tomorrow following the first set up.
