While the MACD can help indicate the market’s movement, Bollinger Bands highlight the sequential nature of the market. Traders use both MACD and Bollinger Bands to support deal arrangements.
Pros of Bollinger Bands and MACD
- Bollinger Bands and MACD are versatile and can be applied to any asset, across any timeframe
- Bollinger Bands naturally provide stop loss levels that coincide with the lower band for long trades and the upper band for short trades
- Both MACD and Bollinger Bands help traders quickly determine the trend and volatility of any market
Cons of Bollinger Bands and MACD
- It’s not advisable for novice traders to combine Bollinger Bands and MACDs. If you’re new to trading, you’ll need to gain a comprehensive understanding of both systems.
- While Bollinger Bands work best in ranging markets, MACD is a trend following momentum indicator. Traders can receive mixed signals if Bollinger Bands and MACD are applied incorrectly.
How do traders use Bollinger Bands and MACD?
A little background knowledge can help traders use Bollinger Bands and MACD to identify successful trading strategies. Traders looking to trade Bollinger Band breakouts usually consider the following steps:
- Use MACD to identify a trending sector or market
- Look for any divergence in the MACD histograms which could signal a potential breakout
- Look out for a break of the 20 moving average or trendline
- Confirm if there is a breakout (breach of the bands), along with increased volatility (expanding bands) and increasing momentum (longer histograms)
If a security generally fluctuates over long periods within a set range, a rectangular pattern forms on the chart. At this point, Bollinger Bands can be used to set up profitable trades.
Why are Bollinger Band and MACD used together?
Bollinger Bands are effective indicators of volatility while MACD serves as a trend-following, momentum indicator. Together they assist in making higher probability trades by gauging the momentum of existing trends along with volatility. MACD can assess if a trend is picking up in momentum or slowing down and Bollinger Bands can be used as an entry or exit trigger and help in the confirmation of a trade.
On a final note
Bollinger Bands and MACD can help traders formulate successful trading strategies. However, due to their complex nature, they require a certain amount of knowledge and and investing discipline. You can leverage real-time streaming market data, analytical tools, and advanced trading capabilities to spot trends and potential trading opportunities with Advanced Dashboard from TD Direct Investing.