In range-bound markets, this technique works well, as prices travel between the two bands like balls bouncing off the walls of a racquetball court.
Let's take a look. As John Bollinger was first to acknowledge: Market trends are rare, which is why trading them is not nearly as easy as it seems. Looking at price this way we can then define trend as deviation from the norm range. This is the reason why they can be very helpful in diagnosing trend.
Therefore, the bands naturally widen and narrow in sync with price action , creating a very accurate trending envelope. What would the logical stop-out point be? The reason for the second condition is to prevent the trend trader from being "wiggled out" of a trend by a quick probative move to the downside that snaps back to the "buy zone" at the end of the trading period. Note how in the following chart the trader is able to stay with the move for most of the uptrend , exiting only when price starts to consolidate at the top of the new range.
Note, however, that counter-trend trading requires far larger margins of error as trends will often make several attempts at continuation before capitulating. But where to place the stop? Putting it just above the swing high will practically assure the trader of a stop-out as price will often make many probative forays to the top of the range, with buyers trying to extend the trend.
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