The Bollinger Bands Trading Strategy Guide

bollinger bands strategy

One of the best quality screeners is offered by The installation principle for this instrument is the same as for Bollinger Bands %b. Copy the unarchived Bollinger_Bands_3b.mq4 file to this directory and restart the terminal.

  • It is equally effective on both 5-minute and weekly timeframes.
  • If one band is pointing in one direction (i.e. up) the other band must point in the opposite direction (i.e. down) to confirm a swing trading opportunity.
  • When the bands are squeezed, it is often a sign that a breakout will happen.
  • This means that a 20 SMA represents the moving average of 4 weeks since traditional markets are only open 5 days out of 7.
  • To understand what this is about, let’s add them to the chart.
  • If you are looking for something specific you can always head on over to our TSG Blog Articles Page.

Instead, it is sometimes wise to measure the width of the “no man’s land” area (distance between +1 and –1 SD) and add it to the upper band. By using the volatility of the market to help set a stop-loss level, the trader avoids getting stopped out and is able to remain in the short trade once the price starts declining. When the Bollinger Bands narrowed, a trader would have expected the price to gain momentum in the near future. As the overall trend was bearish and the price was near the upper Bollinger Band (1), a decline would have likely occurred. At the same time, the stochastic oscillator was in the overbought area (2), which was another alert of a potential drop in price.

Bollinger band strategies

Perhaps a more useful way to trade with Bollinger Bands® is to use them to gauge trends.

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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. Not exiting your trade can almost prove disastrous as three of the aforementioned strategies are trying to capture the benefits of a volatility spike.

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In this setup, you are not obsessed with getting in a position for it to swing wildly in your favor. Nor are you looking to be a prophet of sorts and try to predict how far a stock should or should not run. Look at the example below and notice the tightening of the bands right before the breakout. Let’s unpack each strategy, so you can identify which one will work best with your trading style. Now that we have covered the basics, let’s shift our focus over to the top 6 Bollinger Bands trading strategies. Regardless of the trading platform, you will likely see a settings window like the following when configuring the indicator.

bollinger bands strategy

If 10 cells are filled in, the calculation will correspond to a moving average with a period of 10. Candles entering the period are marked with a blue rectangle in the chart. Now that we have a clear understanding of how to calculate and interpret Bollinger bands, let’s review some strategies based on them in the next section.

How to trade with the trend using Bollinger bands

Heavy movements provoke a significant increase in volatility and the bands widen. Because of this, the level of dispersion increases and the Bollinger Bands expand. In the case of a bullish strong trend, after the channel narrowing, we will see a strong fall of the lower Bollinger band downwards against the main trend. This phenomenon is an early signal of a bullish trend reversal. This can be both an oversold signal and a trend reversal signal. A little later, the Alligator lines cross, which confirms the trend change and lets us open a short position.

It is equally effective on both 5-minute and weekly timeframes. 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.

Live prices

It represents a failed growth with an amplitude less than the previous one (ideally ends around the peak of the left shoulder) and a subsequent fall in price setting a new low. The right shoulder may be followed by another minor growth, bringing prices back to the vicinity of the lows of the left and right shoulder. Therefore, these formations are often used to predict trend reversals and open positions. Another feature of W-bottoms is the presence of some smaller formations in their structure. A closer look at smaller timeframes reveals reversal signals.

Within the described trading system, we will only be interested in levels above 80 and below 20 signaling a potential market top and bottom. 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”.

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