Sign In Password Login

Find passwordVerification code will be sent to your phone

Set your new password

Bind mobile phone numberVerification code will be sent to your phone

+86

Send code
60s
Send code
60s

Create an account

Login
Submit

I have read and agreed User Agreement , Privacy Policy

Other login methods

User Agreement

Confirm

Privacy Policy

Confirm

THE ULTIMATE BOLLINGER BANDS TRADING STRATEGY

Put on your headphones and enjoy podcast ~!
A Bollinger Band is an indicator tool that is widely used in technical analysis of financial markets. This technical indicator is composed of three different lines, where one sits below and one above the asset price.
Bollinger Bands technical indicator was first introduced by the US-based technical analyst John Bollinger in the 1980s. He created a technical indicator based on the specific parameters (more on that later).

1.WHAT ARE BOLLINGER BANDS?

In practice, Bollinger Bands represent one of the most potent and reliable trading indicators in the world of technical analysis. This indicator is mainly used to interpret the strength of a trend and identify market tops or bottoms.
The first thing you would've noticed from this chart is the three wavy bands: the upper band, middle band, and lower band. Here are a few key points to bear in mind when analysing Bollinger Bands:
(1)The price movement outside of the band envelope is usually not sustainable.
(2)Price action above the upper band indicates overbought markets (and vice versa)
(3)Contraction represents low price volatility, while expansion represents high price volatility.
(4)Around 95% of all price action occurs between the upper and lower boundaries.
As we mentioned earlier, Bollinger Bands consist of three different lines. The centre line is a simple moving average (SMA), whose default value is usually 20. These values can be adjusted to fit the requirements of each person’s unique trading style.
The upper Bollinger Band represents a value that is two standard deviations above the average (a positive deviation). Conversely, the lower band represents a value that is two standard deviations below the average (a negative deviation).

2.BOLLINGER BANDS TRADING STRATEGIES

There are various strategies involving the use of Bollinger Bands. Let’s unpack each strategy, so you can identify which one will work best with your trading style.
2.1 Double Bottoms and Bollinger Bands
A common Bollinger Band strategy involves a double bottom setup. To use this strategy, you need first to set up your chart. The closing price of each bar is crucial to this strategy, so it’s best to use a Line On Close chart.
Next, load the Bollinger Bands on your chart with the following settings:
(1)Lookback period: 20
(2)Standard deviation multiple: 2
Then, identify the double bottom (W Signal). The first bottom of this formation tends to have substantial volume and a sharp price pullback that closes outside of the lower Bollinger Band.
2.2Reversals with Bollinger Bands
Another simple yet effective trading method is fading stocks when they begin printing outside of the bands. Now, let’s take that one step further and apply a little candlestick analysis to this strategy.
Instead of shorting a stock as it gaps up through its upper band limit, wait to see how that stock performs. If the stock gaps up and then closes near its low and is still entirely outside of the bands, this is often a good indicator that the stock will correct in the near-term.
2.3 Riding the Bands
The single biggest mistake that many Bollinger Band novices make is selling the stock when the price touches the upper band or buy when it reaches the lower band. Bollinger himself stated a touch of the upper band or lower band does not constitute a buy or sell signal.
Instead, the stock’s failure to continue to accelerate outside of the bands indicates a weakening of its strength. This would be a good time to think about scaling out of a position or getting out entirely.
2.4 Bollinger Bands Squeeze
Another trading strategy is to gauge the initiation of an upcoming squeeze. This Bollinger Bandwidth formula is simple (Upper Bollinger Band Value – Lower Bollinger Band Value) / Middle Bollinger Band Value (Simple moving average).
The idea is to use daily charts, and when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase.
2.5 Snap Back to the Middle of the Bands
This strategy is for those of us that like to ask for very little from the markets. The key to this strategy is waiting on a test of the midline before entering the position. You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend, and there is a sizable amount of volatility.

3. MAKE PROFITS WITH BOLLINGER BANDS STRATEGY

Next, we will present how a basic Bollinger Band strategy will help you make profits. By looking at a real-time trading situation, we will assess Bollinger Band buy and sell signals. We can see that a strong downtrend in market momentum forced prices below the lower Bollinger Band.
This move created our initial buy signal as prices began to trade outside of the 95% containment region. Additionally, the price broke above the midline to further justify the buy signal.

Next, we can see that valuations move sharply higher to reach the Bollinger Bands’ upper boundary. This occurs without market prices breaking above the upper boundary, signalling that markets have not become overbought. Therefore, the current rally remains sustainable within the 95% containment zone.
From here, markets continue moving higher. Eventually, the reduced liveliness in the markets constricts the Bollinger Band structure, and price falls below the 20-day SMA mid-line. This is a minor signal which suggests bullish momentum is beginning to weaken.
Thus, it is not surprising to see a sell signal quickly developing – the first downward arrow on the chart. The market prices then finally breach the upper band. At this stage, traders are left with an important decision to make. Is it time to close the trade or continue with the underlying bull position?
Of course, these types of questions are determined by individual risk tolerance. A conservative trader might decide to collect profits given the substantial gains that have already been made. A more aggressive trader might choose to stay in the long trade and chase more significant profits. When prices bounce from this line, it gives us additional evidence that the upward trend is still in play.
From here, the price continues moving higher until valuations breach the upper band once again – the second downward arrow. On this second break, the trend has reached its end, which is apparent when prices ultimately fall below the 20-day SMA. All signals to close the long trade have been generated at this stage, and a trader is advised to collect profits.

4.DOUBLE BOLLINGER BANDS STRATEGY

In the second example that we will present, we will witness the efficiency of the Double Bollinger Bands' trading strategy. This strategy allows you to trade Bollinger Bands in ranging markets. For this reason, traders often use a Bollinger Bands Forex Strategy.
Double Bollinger Bands strategy advises you to enter long trades when price breaks below the lower standard deviation and vice versa. In this way, you will be trading Bollinger Bands on both sides of the market.
On the left part of the chart, gold prices have fallen sharply through the lower band. A buy signal is generated at $1,490 as prices are now expected to move higher in the short term.
Stop losses for the trade can be set at $1,486.50, and this allows us to set a profit target at $1,510.20. These trading parameters will enable us to keep a favourable risk-reward ratio of at least 3:1. Shortly afterward, our target is reached.

5.TIPS FOR BOLLINGER BANDS TRADING

(1)The Bollinger Bands provide a relative definition of high and low.
(2)The relative definition can compare price action and indicator action to arrive at rigorous buy and sell decisions.
(3)The price can, and does, walk up the upper Bollinger Bands and down the lower Bollinger Bands.
(4)Volatility and trend have already been deployed in the Bollinger Bands construction, so their use for confirmation of price action is not recommended.
(5)The indicators used should not be directly related to one another. For example, you might use ‘one-momentum' or ‘one-volume' indicators successfully, but two-momentum indicators aren't better than one.
(6)Appropriate indicators can derive from momentum, volume, sentiment, open interest, inter-market data, etc.
(7)The Bollinger Bands can also be used to clarify pure price patterns such as M-tops and W-bottoms, momentum shifts, etc.

6.BOLLINGER BANDS IN CRYPTOCURRENCY TRADING

Additionally, you can also use Bollinger Bands as one indicator that can help your trading journey in the cryptocurrency market.
This indicator still serves the same purposes as it does in other financial instruments, which is to indicate volatility in an asset’s price. Ultimately, you can closely observe the contraction and expansion between the lower and upper Bollinger Bands.
One of the core ideas in using Bollinger Bands in crypto trading is what is called the squeeze. The squeeze occurs when the bands move closer together, which is considered a sign of increased volatility and new trading opportunities.
On the other hand, when Bollinger Bands move further apart, this often means lower volatility — a sign that it may possibly be time to exit a trade.
In many cases, it is important to understand that when a price hits the respective Bollinger bands, this does not indicate oversold or overbought conditions.
Thus, it is best for you to develop your cryptocurrency trading strategies using Bollinger Bands, moving averages, the RSI, and oscillators. While a combination of indicators will not necessarily provide perfectly accurate reversal points, they can narrow down the potential reversal points.
(by RICHARD COX)

Comments

Post comment after logging in
0/500
Comments

Short Comments

  • Bollinger Bands have multiple functions and are very effective and convenient to use. Once mastered, they have clear signals and flexible use. They are loved by professional investors. They are also one of the most commonly used technical indicators in the international financial market.

    Reply
    0/500
  • "ForexSoul" is really good, and it has some tricks!

    Reply
    0/500
  • Trading can still be played like this.

    Reply
    0/500
  • 還沒有在加密貨幣中用過指標,擔心波動太大了指標失靈。看完此文,或許我可以試試。

    Reply
    0/500
  • I like to trade with a Bollinger band combined with a candle pattern.

    Reply
    0/500
  • As it happens, I recently tried the double Bollinger band strategy, which can be used for reference.

    Reply
    0/500

Short Comments

No comments yet, comment now

I want to contribute

ForexSoul - An online magazine for forex traders

Podcast of quality content assists your trading journey

Current Issue(Total of 10 articles)

HottestNext

Feedback

We value your suggestions

  • Select your problem

  • Content(0/200)

  • Contact

  • Submit

Add website to favorites

Quality content to hone your trading skills!

Add to favorites