Bollinger Bands Guide: Trading Strategies & Best Settings

Bollinger bands strategy

It helps traders visualise volatility and determine when a trend is likely to continue or reverse. To set up a moving average on our trading platform, all you need to do is open the price chart for your chosen market and select the indicator list at the top of your chart. During normal market conditions, the bands usually appear to move together, creating a synchronous pattern.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience. There are thousands if not millions of assets in the world, starting from the well-known euro, dollar, gold, bitcoin, and others. In a ranging market, a move that starts at one band normally carries through to the opposite band. See our Terms of Service and Customer Contract and Market Data Disclaimers for additional disclaimers. Always do your own careful due diligence and research before making any trading decisions.

Trading the Bollinger Bands®: How to Use Multiple Time Frames

If the period for some reason increases to 50 bars, you should use the ratio 2.1. Many experts agree that strategies based on breakout signals are the most effective. The Bollinger Bands indicator is among the best indicators for tracking and predicting future impulses. Rooney, technical analyst and trader with ten years of experience, winner of an award in writing trading systems. On the other hand, if the price moves in the sell zone, it indicates the strength of the bearish trend. By analogy, here you should open short positions (provided the closing points of the two previous bars are in the neutral half) and keep them until the candle closes return to the neutral zone.

  • When buying, take profit will be located on the upper bollinger band, and when selling — on the lower one.
  • As a result, as with many other things in life, it’s necessary to find a balance.
  • After that, in the area marked with a blue rectangle, the lower band reverses and begins to move up.

The general principle is that the range of deviations is in direct proportion to the degree of variability of the series. Simply put, in a volatile market, Bollinger bands expand, and in case of consolidation, they narrow. Chaikin used a 21-day moving average for his bands offset up and down so that the resulting zone contains about 85% of last year’s price data. However, he later realized that the key to success in establishing the width of trading bands is the degree of market volatility. The red lines are the upper and lower boundaries of the channels.

Bollinger bands outside of finance

Many Bollinger Band technicians look for this retest bar to print inside the lower band. This indicates that the downward pressure in the stock has subsided and there is a shift from sellers to buyers. Also, pay close attention to the volume; you need to see it drop off dramatically. Regardless of the trading platform, you will likely see a settings window like the following when configuring the indicator. For this reason, it can be used to find an edge in the market.

Bollinger bands strategy

Using the default parameters of a 20-period look back and plus/minus two standard deviations, bandwidth is equal to four times the 20-period coefficient of variation. After the surge above 40, the stock again moved into a consolidation phase as the bands narrowed and BandWidth fell back to the low end of its range. Another setup was in the making as the surge and flat consolidation formed a bull flag in July. Despite this bullish pattern, SBUX never broke the upper band or resistance. Instead, SBUX broke the lower band and support, which led to a sharp decline.

Strategy #2 – Squeeze strategy

The author of the indicator looked for an effective way to select the interval for a long time. The very first mention of a tool similar to Bollinger Bands dates back to 1960. Thanks Rayner, for such type of premium contents you provided free of cost on You Tube and your website. No one gives such type of contents even if in their paid programs.

Bollinger bands strategy

Therefore, never use them only as an overbought/oversold oscillator. Before trading the Bollinger bounce you have to identify the current market conditions. In the first case, this strategy will work like a charm, but in the second one, be prepared to lose a lot of money.

Rule #5: Stop Loss / Take Profit Target

Notice how the Bollinger Bands width tested the .0087 level three times. The other point of note is that on each prior test, the high of the indicator made a new high, which implied the volatility was expanding after each quiet period. In the previous section, we talked about staying away from changing the settings.

Which indicators work best with Bollinger Bands?

Bollinger Bands can be used in combination with different indicators, like RSI, as well as support and resistance, moving averages, and any other research tools that may support your analysis.

Regarding identifying when the trend is losing steam, failure of the stock to continue to accelerate outside of the bands indicates a weakening in the strength of the stock. This would be a good time to think about scaling out of a position or getting out entirely. The middle line can represent areas of support on pullbacks when the stock is riding the bands. You could even increase Bollinger bands strategy your position in the stock when the price pulls back to the middle line. For example, instead of shorting a stock as it moves up through its upper band limit, wait to see how that stock performs. If the stock goes parabolic or gaps up and then closes near its low while near the outside of the bands, this is often a good indicator that the stock will correct on the near-term.

The Bollinger Bands + RSI Trading Strategy

When a market’s price is higher than its moving average, it’s said to be in an uptrend. And when the price moves below the moving average, we can look for sell signals. Conversely, in a W pattern, the market price hits two lows consecutively with a rise in the middle. This is a bullish reversal pattern, indicating the price is likely to break out higher.

Alter the settings so that when you look at historical charts, you can see how the Bollinger bands would have helped you. 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.

What time frame is best for Bollinger Bands?

Bollinger Bands typically use a 20-period moving average, where the ‘period’ could be 5 minutes, an hour or a day.

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