Hi all.New to this forum. have studied T/A for over two years now and starting to get a handle on it.(i think)

I have a question tho:
Assuming the candle has closed as a spike, how do you know, actually in the move, here and now, when a spike outside the Bollinger Band is a market 'tester' for new territory or an exhaustion spike and retraces? sometimes I have been caught taking a countertrend short reversal when in fact the sentiment is still bullish, and consequently get stopped out. Clearly afterwards the retrospective subsequent proof showed continued strength but In the move how to know? thanks in advance for any constructive comments. Craig

Hi Craig,

Welcome to the community.

Let me start by saying that no strategy or piece of analysis is going to be correct all the time in fact as I discuss in my lessons on money management, many successful strategies that I have seen have more losing trades than they do winners. So with this in mind I think the first thing that it is important to understand is that while a trader in my opinion should always seek to improve on their strategy and analysis they must also make sure, as I discuss in my lessons on trading psychology, that they are prepared to take losses.

With this being said there are a number of things that could be tried to improve on what has been laid out in your post.

The first question I would ask in a situation like this is are there any other pieces of analysis currently being used in conjunction with a spike outside of the bollinger bands to determine trade entry?

As I talk about in my free basics of trading course one of the first places that in my opinion traders should start is by using multitimeframe analysis to get a complete picture of the market. An example of how this may help with the situation you have outlined below is if your multi time frame analysis shows that the market is in a well defined downtrend and you get a spike above the bollinger band, then this may not be the best buy because the trader would be going against the market momentum as defined by the short, medium, and long term trends in the market.

A second thing that I talk about in my free basics of trading course is using multiple pieces of analysis for confirmation. With this in mind a trader using the below strategy might want to choose between one of the main momentum indicators such as RSI or Stochastics and add this piece of analysis into the strategy to try and get a better idea of what the momentum behind the spike you reference is.

Lastly I think it is important to remember that one must in my opinion always have a profit objection and a loss limit in mind with any trade and use a sound methodology for determining what those should be. Again here I would stress that there will be times when the money management strategy used to place stops will take a trader out of a trade just before it moves in their favor but this is simply part of trading.

Hope this helps. If there are any other comments or questions on this one please feel free to leave them below.

Best Regards,
Dave

Craig,

Most traders use a combination of support and resistance with Bollinger Bands(BBs). Consider the example in this image of a 60 min GBP/JPY chart.



The horizontal lines represent differing levels of support and resistance. "e" represents and entry, whereas "x" represents an exit.

1e shows the price striking the lower BB at the exact level of support. You can see on the chart that it formed a double bottom. When this bar closes, you go long. The exit point for a range BB trade is the price hitting the opposite band, which occurs at 1x.

2e again hits the lower band at a clearly defined support level. Wait for the candle to close, which confirms that supports hold firm. The profit target again strikes the opposite BB at 2x.

3e represents the same confluence. The price hits support and strikes the lower BB. This trade fails, but you have no way of knowing that in advance. I would rate this a good trade even though it did not work out.

3x/4e demonstrates what I call a "hard close:" a large bar slams against support and the candle closes right at or near the same level. This is a big warning that a range trade may not be called for.

Step back and look at the bigger picture. Draw a mental line from 2x to 3x. Does this look like a range or a trend? The price is moving linerally, making it unlikely to bounce. You already know that it broke support. The price is more likely to move down than up.

Here is a clear time to eat the loss from trade 3 and to reverse direction. A close above the SMA20 (the 20 period simple moving average) is your trailing stop/profit target.

Strategy rules:
Long range:
price hits the lower BB but closes above it AND price closes at or near recent support
Exit when the price strikes the upper BB

Long trend:
price closes above the upper BB AND price breaks resistance
Exit when the price closes below SMA20

Opposite rules for short trades

Hope this helps,

Shaun