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Two of the most successful traders of their own and institutional accounts that I’ve met said to me something in common.
I’ll never forget the day I spoke to a trading friend of mine who now works for Standard Chartered. I asked him about his technical analysis.
He said “all I use is 3 lines and that’s it.”
He had been chasing the path of the holy grail for his first 6 months in trading his own account. He’d been making money, but he wasn’t happy with his consistency.
Now he’d discovered these “3 lines” it had changed his trading style and his life. He even was commuting once per week to HONG KONG from the UK flown business class by Standard Charter to trade for them.
Another trader who had worked for Bank of America in New York said almost the same thing. He admitted he was obsessed with these “three lines” and would not trade without them.
What are these three lines that can change your life then?
Bollinger Bands
Bollinger bands take a moving average line and calculate 2 standard deviations (square root of the variance of the data) on either side of that moving average.
This creates a 95% probability that the price action will take place within the upper and lower bands at any given time and on any time frame.
Because the spread of data around the mean (the moving average) is calculated, the bands will come closer together around the times of sideways movement in the market.
When the market breaks out of sideways trading and starts to form a trend, the bands will widen out.
Knowing that 95% of the time the action will take place within the bands can give you an edge, as well as the bollinger bands showing you levels of support and resistance in the market.
You can use an RSI to determine whether or not the market is overbought or oversold and time your entries using the bollinger bands as guides along with Japanese candlestick patterns.
Simple is best!
