How Do I Create a Trading Strategy With Bollinger Bands® and the MACD?

Technical traders use many indicators to develop trading strategies. Many of these tools can also help ordinary investors. With a little background knowledge, you can develop a profitable trading strategy using indicators such as Bollinger Bands and the moving average convergence divergence (MACD).

Understanding Bollinger Bands

Bollinger Bands, developed by technical analyst and trader John Bollinger, are a set of bands surrounding a security's moving average that show standard deviations. For a security that generally fluctuates within a set range for long periods of time, creating a rectangle pattern on a chart, you can use Bollinger Bands to set up profitable trades.

The buy-and-hold method provides little profit on securities that move sideways. However, by buying at or near the lower Bollinger Band and setting limit orders to sell at or near the upper band, you can capitalize on price fluctuations. Customize your risk level with this strategy by adjusting the Bollinger Band settings to a lower standard deviation with one instead of the standard two.

How MACD Is Used

MACD is typically used to reveal whether a security is overbought or oversold, which generally leads traders to adopt strategies that account for a coming trend reversal. A popular trading strategy that utilizes the MACD's power is trading divergences. When you see new highs in the security's price but not on the MACD, sell your long positions or enter short positions, as this indicates momentum behind the higher prices is waning, and prices will soon adjust.