Bollinger Bands Strategy

—especially when paired with other indicators such as chart pattern recognition tools—can help you make better trading decisions. Hence, selling options when Bollinger Bands are far apart, potentially could be a smart options volatility strategy. A trader might buy when price breaks above the upper Bollinger Band after a period of price consolidation. I go to the charts to show you what setups I am currently trading in Ethereum, S&P, Nasdaq, Crude Oil and Bonds.

bollinger bands strategy

Trendlines have been drawn to show the trend direction based on Bollinger band guidelines discussed below. Although it is a primarily a volatility indicator, the Bollinger Bands is quite useful in discovering support and resistance areas. Bollinger Bands can also be prone to providing false signals.

Enter Profitable Territory With Average True Range

The middle band is a moving average, and its parameters are chosen by the trader. The upper and lower bands are positioned on either side of the moving average band. The trader decides the number of standard deviations they need the volatility indicator set at. The number of standard deviations, in turn, determines the distance between the middle band and the upper and lower bands. The position of these bands provides information on how strong the trend is and the potential high and low price levels that may be expected in the immediate future.

On the flip side, if a crypto’s price tags at and falls below the lower Bollinger band, this is an indication that the coin is oversold. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.

  • When the instrument’s price moves towards the lower band, this is a signal that it’s oversold.
  • Yes we can, look at how we missed that price action in the summer of 2018.
  • Aim to profit from the strong uptrends before a reversal occurs.
  • On their own, the indicator and Bollinger Band strategy are worthless and take a lot of work to use correctly.
  • There are many tools that can help you in your daily activity of trader.

In theory, Bollinger Bands will contain all trading activity that occurs within 2 standard deviations of the expected norm . This is why we are using the RSI indicator to help confirm and trade the “bounce” of an upper or a lower band. The best combination of technical indicators is the RSI – a momentum indicator with Bollinger Bands – a trend-following indicator. When you see the band widen that simply means that there is volatility at that time. When the price moves very little, the band will narrow which means that there is little volatility. Bollinger Bands are well known in the trading community.

Here is a brief look at the differences, so you can decide which one you like better. Perhaps a more useful way to trade with Bollinger Bands® is to use them to gauge trends.

It’s not that the bands are doing anything wrong or not working. Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error. The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin. But I will be the first to tell you that most breakouts fail.

The Bollinger Bands are a great indicator to use in any market. When you combine these with the RSI indicator, it should give you great entry points. Here is another strategy called trading volume in Forex.

A basic overbought/oversold trading strategy can work well using Bollinger Bands, but it can’t be used blindly without consideration for the overall market. So, it won’t work to just buy when price reaches the bottom of the bands or sell when it reaches the top. While this strategy can work very well during range-bound markets, it is a recipe for failure during a trending market. If the trader determines the market is range-bound then trading off the tops and bottoms of the Bollinger Bands will yield success.

Indicators To Combine With Bollinger Bands

Bollinger Bands® can help you assess the relative strength of an investment over the short term. If the price is in an uptrend, and continually hitting the upper band , when the price hits the lower band it could signal that a reversal has commenced. If the price rallies again, it likely won’t be able to reach the upper band or the recent price high. When the price is in a strong downtrend, it shouldn’t touch the upper band. When the priceis in a strong uptrend it will typically touch or run along the upper band during impulse waves higher. When it fails to do that it shows the uptrend may be losing momentum.

But it can be used as an entry by traders who want to pyramid their position, with a stop below the recent low at $48. Invented in 1983 by John Bollinger, they’re designed to help traders evaluate price action and a stock’s volatility. A trader might be better to wait and see if the price moves above or below the Bollinger Band. When the price closes back inside the Bollinger Band, then the potential trigger to buy or sell short might occur.

Using Bollinger Bands

The authors did, however, find that a simple reversal of the strategy (“contrarian Bollinger Band”) produced positive returns in a variety of markets. The center of the Bollinger Bands ® is the 20-period moving average and the perfect addition to the volatility based outer bands. If the Bollinger Bands don’t help you then change the settings or don’t use the bands to trade that particular asset. Ideal Bollinger bands setting vary from market to market, and may even need to be altered over time even when trading the same instrument. Choose a setting that aligns with the techniques below, for the asset being traded. The attached chart shows a one-minute crude oil futures chart with Bollinger bands.

bollinger bands strategy

Besides the advantages for trading, Good Crypto allows you to track the whole cryptocurrency market, over 5,000 currencies and 10,000 trading pairs, all in real-time. Keltner Channels show a middle line that represents the Average True Range . The ATR is calculated Credit note by dividing the highest by the lowest price over a certain period. The most common default setting for ATR in Keltner Channels is 20 periods . Are somewhat similar to the Bollinger Bands, and some people place both indicators on top of each other.

Bollinger Bands Vs Keltner Channel

After prices have rested, such as periods when the Bollinger Bands are extremely close together, then prices may begin to move once again. Because of the architecture of the Good Crypto application, your balance is never frozen after you send a conditional order. trading strategy As a result, you can place an infinite amount of trades to test your ideas and strategies. Moreover, you can receive alerts when a certain price has been reached. This creates freedom for traders to create setups for multiple possible scenarios at the same time.

What It Takes To Trade With Bollinger Bands

When the bands squeeze together, it usually means that a breakout is getting ready to happen. If you’re freaking out because you’re not familiar with standard deviations. Just like in trading, certain technical indicators are best used for particular environments or situations. In a different example, Yahoo broke the lower band on December 20, 2006. The strategy called for an immediate buy of the stock the next trading day. John Devcic is a self-educated investor who began experimenting in the market as a teen, whose topics include trading strategies and charting methods.

This would act as a trailing stop, which means that you would constantly adjust the stop in the bearish direction. This is the 4-hour chart of the EUR/USD for Apr 1 – Apr 16, 2014. This chart illustrates a long position initiated by a reversal candlestick chart pattern.

Bollinger Bands ® Explained 101

At the core, Bollinger Bands® measure deviation, which is why the indicator can be very helpful in diagnosing trend. Cory Mitchell, CMT is the founder of He has been a professional day and swing trader since 2005. Cory is an expert on stock, forex and futures price action trading strategies. The wider the Bands are, the more volatile the price is, and the more likely the price will fall back towards the moving average.

Author: Annie Nova

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