Bollinger Bands Trading Strategy: How to Use Them for Identifying Market Trends

The classic M top is formed by a push to a high, followed by sell-off reaction, and then a test of the previous high. Watching the price behave like this, a trader may wonder if the stock is in a new uptrend, or if it has met its resistance. I think it will be highly beneficial for all who will obey pros and cons of rules of the bollinger band strategy.

bollinger bands bandwidthWidth values should be gauged relative to prior BandWidth values over a period of time. It is important to get a good look-back period to define BandWidth range for a particular ETF, index or stock. For example, an eight- to twelve-month chart will show BandWidth highs and lows over a significant timeframe. BandWidth is considered narrow as it approaches the lows of this range and wide as it approaches the high end. Significant studies have also been conducted on how the Bands work in tandem with Double-Top (M-Top) and Double-Bottom (W-Bottom) pattern formations.

Further reading

The broker is headquartered in New Zealand which explains why it has flown under the radar for a few years but it is a great broker that is now building a global following. The BlackBull Markets site is intuitive and easy to use, making it an ideal choice for beginners. Determine your entry point after a “squeeze” of consolidation occurs after the RSI confirms direction and when the candlesticks close below the midline. Calculate a Simple Moving Average of price behaviour, (the standard period setting is “20” but can be customised to suit your needs). Since Bollinger Bands use the population method of calculating standard deviation, the proper divisor for the sigma calculation is n, not n− 1. Bollinger bands have been applied to manufacturing data to detect defects in patterned fabrics.

• It goes short on the next open whenever the index closes below it’s lower band.
• If the period for some reason increases to 50 bars, you should use the ratio 2.1.
• The Bollinger Bands are a great indicator to use in any market.
• And likewise, a downside close below the lower Bollinger Band gives a negative volatility breakout.
• This normalized Bandwidth can then be compared across different timeframes or with the BandWidth values for other securities.

In this example, I bumped down to a one-hour chart to make an entry. This could give you a more accurate place to make an entry point. As I said, the 4-hour and 1-minute time frames are the preferred time frames for this strategy.

What are the best indicators to use with Bollinger Bands?

After selecting the multiplier and the period, you can calculate the Bollinger bands themselves. At the next stage, we add up the list of data we have obtained. To get a non-zero result, we need to get rid of negative values ​​by squaring them.

They would watch out for a strong shoot into the Buy Zone or Sell Zone, and open a long or short position accordingly. This Bollinger Bands trading strategy relies on the mean reversion of the price. Mean reversion expects that, if the price significantly deviates from the average, it will eventually revert back to the mean price. If asset prices continuously touch the upper Bollinger Band, the prices are considered to be overbought. Conversely, if they continuously touch the lower band, prices are thought to be oversold.

A simple Bollinger Bands trading strategy

By default, the Bollinger Bands period is set at 20 and StdDev at 2. This is why we are using the RSI indicator to help confirm and trade the “bounce” of an upper or a lower band. This special strategy teaches you how to read Bollinger Bands and it’s signals. You’ll also learn about Bollinger Bands squeeze, double Bollinger Bands Bounce Trading Strategy, Bollinger Bands secrets, and more.

Perhaps a more useful way to https://trading-market.org/ with Bollinger Bands® is to use them to gauge trends. Timothy Li is a consultant, accountant, and finance manager with an MBA from USC and over 15 years of corporate finance experience. Timothy has helped provide CEOs and CFOs with deep-dive analytics, providing beautiful stories behind the numbers, graphs, and financial models. If you still have any doubts in this regard, we recommend watching the video again or reading our introductory article on Bollinger Bands. The Bollinger Band Width makes it easier to visually identify new highs and lows. It is defined by alternating phases of volatility compression and expansion.

Bollinger Bands® are a trading tool used to determine entry and exit points for a trade. Use caution and always consult your accountant, lawyer or professional advisor before acting on this or any information related to a lifestyle change or your business or finances. Chart 5 shows Honeywell with an extended trading range in the area. There was a move to the upper band in May, but no breakout for a signal. Instead, HON clearly broke below the lower band to trigger a bearish signal in June 2007.

This not only gives them more confidence in their predictions, but also strengthens their strategy. This guide explains how to combine Bollinger Bands and Relative Strength Index, two of the most popular indicators to strengthen your trading strategy. The Bollinger Band design contains three main components, the middle band, upper band, and lower band.

RSI Indicator: How to Use, Best Settings, Buy and Sell Signals

Narrow bands indicate a squeeze, which means that volatility is low. But remember, since volatility is mean-reverting, the bands will probably expand, signaling a potential for an explosive move. A simple way to spot a squeeze is to identify when the bands are the narrowest they have been for the last six months. By default, the outer bands are 2 standard deviations away from the middle band . Another strategy of using Bollinger Bands is in trend following. This is a strategy that involves buying when other traders are buying and selling when others are selling .

These types of movements can be exploited and leveraged with trend-following entries, an example of which we’ll see shortly. This scan reveals stocks whose Bollinger Bands just expanded rapidly after being contracted for 5 or more days. The chart above shows the Nasdaq 100 ETF with Bollinger Bands, BandWidth, and the Standard Deviation. Notice how BandWidth tracks the Standard Deviation – both rise and fall together. The image below shows a spreadsheet with a calculation example.

This strategy is the complete opposite of the Bollinger Bands bounce strategy. The founder of breakout trading is Bruce Babcock, the author of the intuitive trading theory. John Bollinger liked his approach to trading volatility breakouts and decided to adapt it to his indicator. In the place of the supposed bounce, one of the bars touches the lower band . In this area, the RSI moves in the direction of the trend and is located in the optimal range from 30 to 50 percent.

A moving average is a technical analysis indicator that helps level price action by filtering out the noise from random price fluctuations. The following trading system is for educational purposes only. Technical analysis can be a great asset in forex trading, but it is not without faulty signals. The first Green circle on the chart has a crossover of the two MAs, but the RSI is not confirming the direction.

There are many tools that can help you in your daily activity of trader. One of the most popular and used are undoubtedly the Bollinger Bands. Another good example of this is Snap, which you can see in the chart below. As you can see, the Bollinger Bandwidth remained in a tight range before the stock collapsed. On the right side, the Bollinger Bandwidth remained at elevated levels ahead of the next earnings.

What are Bollinger Bands and how do they work in trading?

When the oscillator lies between the limits, the market is considered flat, indicating a low short-term possibility of a trend reversal. Yes, there are many more Bollinger Bands trading strategies out there. But it’s not about getting to know all the trading strategies. Gimmee Bar is a concept by Joe Ross – one of the earlier traders to focus on short-term price patterns. Here, we’ve rounded up five trading strategies to showcase this versatile trading indicator.

Therefore, the minimum target should be at least 6 pips above the buy price. It is recommended to use the strategy of double Bollinger bands on trend instruments. In the chart, we see that at the moment of the formation of the right shoulder, traders are confused.

The “Bollinger Bands Accordion” reflects how volatility varies with price behaviour. When the candlesticks hug one boundary limit, they tend to bounce back to the centreline. When the bands squeeze, they also tend to expand quickly after that as a price breakout follows a consolidation.

They form the beginning or end of the compound segments of a large figure. Longer right side suggests that there is a sentiment of disappointment in the market. Many investors expect another retest of the lows, abandoning their positions and are extremely disappointed after the price soars up. The EURUSD chart shows Bollinger Bands at the time of the trend development.

We take profit when one of the bars crosses the Bollinger Band opposite to the trend direction. For an upward movement this will be the lower Bollinger bands, and for a downward movement it will be the upper one. To measure how close the price action is to one of the bands, we will use the Bollinger Bands %b indicator. I talked about it in detail in the section “How the Bollinger Wave Indicator Works”.

This indicator can be used to identify periods when volatility changes as well as potential changes in an asset’s price. In terms of volatility, Bollinger bands are able to show when volatility is reaching extreme lows, relative to the asset’s recent history. They do this by moving toward each other and ‘squeezing’ together. Option traders refer to these low-volatility periods as consolidations. They will then place their trades in line with the new price trends that form when the asset’s price breaks out and volatility is present in the market.

I prefer use Bollinger Bands and RSI divergence to find high probability reversal trades. I’m still not understand how RSI work as indicator for entries or exit. I use the 1 hour chart for trading and 4 hrs for trend confirmation. I find it easy using my phone than my laptop, problem is, on my phone there’s only the middle moving average and don’t know how to set up the outside ones. Levels of the RSI.As always ,the traders wille ever grateful to you. Although Bollinger Bands can alert you to potential breakout trades, it doesn’t tell you the direction of the breakout.