A popular combination of indicators is the Bollinger Bands along with the moving average convergence divergence (MACD). Using both indicators gives you the best of both worlds: a momentum indicator that can help predict turning points in the market along with a volatility indicator for determining entry and exit points.
How you can take advantage of this charting combination in your own trades is what we’ll explore in this article.
Bollinger Bands and MACD
The Bollinger Bands and MACD are a favorite chart combination for several reasons. The Bollinger Bands can help you visualize the volatility of a given index or security, while the MACD gives you an indication of momentum. Keep in mind that momentum is a leading indicator to price, so momentum will change before action is seen on the charts.
One strategy to use with the MACD is to buy once the signal line moves above the center line. You can see in the example above that the indicator made numerous crossovers on the chart to give you an idea of the change in momentum.
Another strategy to use with the MACD is to buy once momentum begins to turn positive and sell once it reaches the peak. Using the MACD histogram you can see the change in momentum as it turns from green to red.
How to trade using Bollinger Bands
The Bollinger Bands give another set of signals that can be used in conjunction with the MACD. To put it simply, when the price moves above the moving average, that’s a buy signal. You would then place your sell order at the top of the band and stop loss at the lower band.
You may also buy when price reaches the top of the Bollinger Band. This method is recommended if you are also seeing strong signs on the MACD and anticipate that it will keep breaking out of the upper limits.
More strategies for Bollinger Band trading can be read here.