Technical traders look at many indicators and charts to develop trading strategies specific for each security. Many of the same tools these traders use can also help ordinary investors. With just a little background knowledge and understanding of how they work, you can make a profitable trading strategy using indicators such as Bollinger Bands and the moving average convergence divergence, or MACD.
Bollinger Bands, developed by technical analyst and trader John Bollinger, are a set of bands surrounding a security's moving average that show standard deviation areas. 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, but 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 the price fluctuations. This trading strategy is referred to as swing trading. Customize your risk level with this strategy by simply adjusting the Bollinger Band settings to a lower standard deviation with one instead of the standard two.
MACD is typically used to reveal whether a security is overbought or oversold, which generally leads traders to adopt trading 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.