Part 2 Creating the first Forex strategy – Bollinger bands

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Contents

Bollinger Bands Strategies And Trading Methods – Part 2

In the first part we have covered the basics of the Bollinger Bands indicator. This article will be focused on Bollinger Bands strategies and ways to trade it. You can use the information as it is and play with it to see what works for you and your trading style or implement it in a different way so that it fits your needs. There are literally tens of ways to apply the methods described below. You can use multiple time frame confirmations, financial instrument correlations and so on..

Bollinger Bands Strategies

Double top formation:

The M pattern is commonly known as the double top, using a Bollinger band strategy can add more meaning to this term in practice.

When prices are repelled by the top band twice it can mean that the market has run out of steam and a race to the bottom band could occur, these instances are a feature of volatility within the market.

In the above chart, prices were repelled twice, and then pushed down to the bottom band.

This double top also marked the beginning of a downtrend.

In this Bollinger bands strategy, you should look for three things to happen to pick out a double top formation and confirm the pattern.

  1. Firstly the price puts in a reaction high to the upper band.
  2. Next a pullback to the simple moving average.
  3. Then price moves back to the first high but will fail at or below the upper band.

The waning momentum causes the failure of the second high, we can then look for confirmation of the top with a break of support and I like to see two candles close whose real bodies are below the MA line.

Double bottom formation:

The opposite will also occur regularly at significant lows.

Where prices drop to the bottom band twice in short order and then are repelled upwards, beginning an uptrend in the market.

In the chart above two W patterns formed in the uptrend, adding weight to the trend and signifying that a trader should stick with the trend.

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There is a four step process in this Bollinger bands strategy to confirm a W bottom is in place.

  1. Firstly a low forms, usually below the lower band.
  2. next a retracement to the middle band.
  3. then a new low forms but will hold on or above the lower band showing a slowing of downside momentum.
  4. And lastly, the pattern is confirmed when the price rallies to the upper band and completes two candles whose real bodies are above the middle band.

A trader should always wait until all of the four steps are complete before trading the move. this will reduce false signals and spare your capital in the long run.

I will commonly use a stop loss order to trade this setup, using the higher ‘price low’ of the formation as the stop loss position.

Bollinger band squeeze:

The Bollinger band squeeze happens when price movements contract to a narrow range.

This causes the Bollinger bands to move inwards towards each other.

It is almost like a pressure is building within the market and it will lead to a sharp movement in prices sooner rather than later.

In the example above, a squeeze always occurred before any significant move in prices.

It is a valuable indication of the possibility of volatility ahead.

So a trader will always be aware of the position and trend in the Bollinger bands. And if you notice the Bollinger bands ‘squeeze’ together, you can start to position yourself because a significant price movement is straight ahead.

How does it work?

When trading using this Bollinger bands strategy, we are looking for contraction in the bands. Above is the EURCHF 60 minute chart lets see what sort of signals are generated from it.

The chart above shows 20 point increments in EUR/CHF, every time the Bollinger band width is approaching 0.0010 or about 10 points, we get an average move away from the moving average of about 40 points sometimes more.

In the above case, a trader could use the squeeze as a signal generator, a signal is generated when:

  • the bands squeeze to within about 10 points
  • and a full candle completes above or below the moving average line.

depending on which side the candle completes that is the side you trade.

So, if a candle completes above the MA, then you go long, and if a candle completes below you go short. your stops should be placed at the opposite extreme of the candle.

Bollinger bands as support and resistance:

Along with giving the trader an indication of future volatility ahead, this Bollinger bands strategy will show support and resistance in a trending market, often repelling prices back into the trend once more.

In both the downward trend and the upward trend i the chart above, the bands acted as consolidation points.

The fact that prices were repelled by the bands showed the trader that they could stick with the trend.

Riding the bands:

Another Bollinger bands strategy is riding the bands, this is when we use the bands as a trend recognition tool.

During strong trend moves, the candles tend to almost stick to the upper or lower band.

This occurrence shows the trader that the trend is likely to continue and has power behind it.

John Bollinger, the bands creator, calls a move that touch the bands a ‘tag’ of the band. this is not exactly a signal but it does denote a strengthening or weakening market.

Take note for a second;

the bands are placed 2 standard deviations away from the 20 period simple moving average on both sides. So the bands contain 95.6% of all the price moves in the last 20 periods.

If the price tags the upper or lower band, it shows us that there is significance in that move. Because it is more powerful than 95.6% of all the moves in the last 20 periods.

IF a powerful move occurs, it can be common for the simple moving average to act as support for the price. The price will usually stay above or below the SMA in a trend move. This knowledge can be used in managing your position when you are trend trading.

Things to take away:

When used alone the bands offer little in the way of timing or trade entry indicators.

  • The Bollinger bands do give the trader a useful benchmark to judge how the price action is likely to act given certain action.
  • They can be a great tool to measure volatility, or lack thereof, in the market.
  • And they can show you where likely support and resistance might occur within a trend.
  • Bollinger band strategy uses these phenomena to trade trend moves within a market

These points alone are evidence enough that we all should take heed of the bands!

Once again I would like to make a note about the two webinars available for free on youtube on the subject of bollinger bands. You can watch them here and here. Don’t forget to subscribe!

Now it is your turn, comment, criticize, suggest and share. Bollinger bands is one of the best financial indicators and is here to stay. In fact there are people who have found a way to implement it outside the financial world.

In a paper published in 2006 by the Society of Photo-Optical Engineers, “Novel method for patterned fabric inspection using Bollinger bands“, Henry Y. T. Ngan and Grantham K. H. Pang present a method of using Bollinger bands to detect defects (anomalies) in patterned fabrics. From the abstract: “In this paper, the upper band and lower band of Bollinger Bands, which are sensitive to any subtle change in the input data, have been developed for use to indicate the defective areas in patterned fabric.”

The International Civil Aviation Organization is using Bollinger bands to measure the accident rate as a safety indicator to measure efficiency of global safety initiatives. %b and bandwidth are also used in this analysis.

Sources: http://humbletraders.com/ | https://en.wikipedia.org/

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I’m glad you find it informative guys!

@ Kostas – I don’t describe it here as it is explained in the video. Here you learn something else. The more the better, no? You can use it for daily and weekly, principle is the same.

excellent analysis but in the video that you posted you show duplication and 20 candles ride.why dont you describe here?and why dont you use bollinger bands for daily or weekly analysis because i didnt see?

Thank you so much for posting the webinars Vlad, will definitely watch it

I see myself a better trader day after day and this is all possible only with your help, thank you so much Vlad!

Wonderful post, really educating us on different strategies of Bollinger Bands.

Very informative..thanks for sharing.

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How to read and use Bollinger bands

Bollinger bands are one of the most versatile technical indicators available for technicians or chartists. The uniqueness of Bollinger bands lies in the fact that it combines two main components; the trend and the volatility. The trend, as every trader knows, is one of the most important aspects when analysing any financial market. A trend in the market will determine the direction of the price. Trading in the direction of the trend, also known as trend trading, is considered to be one of the safest ways to trade.

This is due to the fact that trend trading allows traders to take positions on the side of the larger market positioning.

There are many trend-based indicators and the Bollinger Bands indicator is one of them. While the trend is important, another factor is volatility. It is widely known that markets tend to range at least 80% of the time, and the markets trend only 20% of the time. Prices seldom move in a parabolic path.

This begs the question of where to enter the trend. Surely, a trader taking a position when the markets are ranging will either have to stay in the markets for longer at a risk of a decline or a correction, or the trader will have to wait for the markets to break out from the range and resume the previous trend, or at times reverse the trend as well. Answering these two questions can be done with the help of the Bollinger bands. Only the Bollinger bands indicator can be used to address these two main questions when it comes to trading. Volatility is also an essential variable to consider when it comes to trading the markets.

Volatility often goes hand in hand with momentum. When volatility slows, you can expect momentum to also decrease and vice-versa. This is why the Bollinger bands are considered to be unique, as it helps traders to decipher a lot of market information. While there are many ways to trade using Bollinger bands, the indicator was designed to address some key concepts. These include signalling when the markets will undergo a reversal at the top and bottom of a trend as well as addressing when volatility is likely to remain high.

To understand these concepts, let’s dig a bit deeper into what Bollinger bands are all about.

What’s a Bollinger Band®?

Bollinger bands, as the name suggests, is a volatility and trend indicator. The indicator is placed as a chart overlay (meaning that the indicator is plotted on the price chart). It’s comprised of three bands from which it derives the name Bollinger bands.

The Bollinger bands indicator was the brainchild of John Bollinger. Bollinger designed his indicator way back in the 1980’s when computers were just getting warmed up to advanced technical analysis for financial markets.

If you look closely, Bollinger bands are not that different from other bands such as the moving average envelopes indicator, or the Keltner or Donchian channels. All these indicators fall into the category of “bands.” However, by factoring in the concept of volatility, Bollinger bands take on their own uniqueness.

Bollinger bands act like volatility bands. Thus, the outer bands tend to expand when volatility increases and they tend to contract or come close when volatility falls. This visual depiction makes it very easy for the trader to understand when to trade and when to stay out of the markets.

Typically, traders stay out of the markets when volatility drops. But it also means that volatility is likely to expand again sooner and thus prepares the traders to anticipate an increase in volatility.

How are Bollinger Bands calculated?

Bollinger bands are primarily based upon a 20-period simple moving average. This 20-period SMA forms the basis for the outer bands (the upper Bollinger band and the lower Bollinger band). These outer bands are derived based on standard deviation.

The typical setting is 2%. This means that the outer bands depict a 2% deviation from the 20-period simple moving average line. Sometimes, you will find that prices tend to deviate more than 2%. This is when you can see the price falling or piercing one of the outer bands.

However, Bollinger bands quickly adjust to this new deviation based on the 20-period SMA. While the 20, 2 Bollinger band setting is generally used, traders can experiment with these values. For example, you cannot expect the same level of deviation between a currency or a Forex instrument and a commodity asset such as gold or oil.

Secondly, the settings can also change depending on the timeframe that is being used. The first chart below shows an example of Bollinger bands applied to an NZDUSD chart. The default settings of 20, 2 are applied here to the daily timeframe.

Figure 1: Example of Bollinger band indicator applied to the forex chart

Upon careful observation, you can notice that when price is strongly bullish or bearish, the Bollinger bands tend to expand. Similarly, when the price is moving within a range, you can see how the outer bands contract.

When looking at the 20-period moving average, you can see the inclination of this 20-SMA signalling an uptrend.

Thus, combining the information, in an uptrend, the most ideal point of entry is when the price breaks out of the range. As volatility increases, traders are able to find better entry points into a trend based on the expansion of the outer bands.

Signal: W-Bottoms

The Bollinger band’s W-Bottom signals are unique. This is a phenomenon that occurs quite often. When the markets establish the “W” bottom pattern, it usually signals that a bottom is taking shape.

This pattern within Bollinger bands can be a great way to pick the lowest points in an uptrend or even signal the end of the previous downtrend.

The second chart below; Figure 2, illustrates the “W” bottom pattern in action.

Figure 2: Bollinger band “W” bottom signal

The “W” bottom pattern is formed when the price falls to a previous low at almost near the same level. Typically, when this pattern is formed, volatility tends to contract in relation to previous volatility levels.

When the price breaks out of the W-pattern, especially after a series of previous declines, you can expect the trend to change in the near term. Another validation of this change of trend is the considerable increase in volatility after the “W” pattern breaks out.

The “M” top pattern is the inverse of the “W” pattern. Here, you can expect to see the “M” pattern forming after a considerable rally in price or during an uptrend. When the “M” pattern appears, prices tend to consolidate amid falling volatility.

Then, a subsequent downside breakout from this “M” pattern signals a decline in prices.

The “M” pattern is shown in Figure 3.

Figure 3: Bollinger bands “M” signal

What’s unique about the “M” pattern in this example is that it is formed within a larger downtrend, but comes after a modest price correction. Thus, it is important to know that the “M” pattern (as well as the “W” pattern) does not always have to occur at the top or the bottom of a trend.

Once the price breaks out of the “M” pattern downwards, you can see that volatility increases and stays consistent. At the same time, the slope of the 20-period SMA signals that the price is building up downside momentum.

Signal: Walking the Bands

Walking the bands is also a rather simple concept. Walking the bands occurs when momentum and volatility are the highest. Prices in this state tend to maintain the direction for a considerable period of time. When this occurs, prices tend to post highs at or above the upper Bollinger band in an uptrend or lows at or below the lower Bollinger band during a downtrend.

Traders should note that walking the bands can last only for a couple of sessions, after which momentum starts to weaken and the price eventually starts to retrace as a result.

An example of walking the bands is shown in Figure 4.

Figure 4: Walking the bands

In the above example, there are two instances of walking the bands. Starting from the left side, you can see the areas where the price consistently “walks the band” seldom falling back to the 20-period simple moving average.

This strong uptrend is formed after a brief period of low volatility. Moving to the right, we see another instance where the Bollinger bands contract only to later move in a range before strongly trending downwards. As you can see, price action has been “walking the lower band” in this instance, with lows and lower closes forming at or below the lower Bollinger band.

Bollinger Bands – Conclusion

In conclusion, the Bollinger bands indicator is a versatile technical analysis indicator. This indicator allows traders to gauge both the trend and the volatility on the price chart. Formed as an overlay, the Bollinger bands are best used to gauge when to enter into a trend as volatility is just starting to increase.

Traders can also use many other technical strategies along with Bollinger bands and build a profitable trading system.

Стратегии на основе полос Боллинджера

Стратегия “Полосы Боллинджера с индикатором RSI”

Возможности валютного трейдинга безграничны. Даже если трейдер использует стандартные индикаторы из МТ4, такие как полосы Боллинджера или RSI. Нужно осознать, что прибыльный сетап может быть и простым.

Самое важное при использовании простых индикаторов — четко определить момент открытия и закрытия сделки. Давайте рассмотрим интересную стратегию, где используется RSI и Bollinger Bands (ВВ).

Индикатор Волны Боллинджера — стратегии, принципы работы

Индикатор Волны Боллинджера – это еще одна версия скользящих средних. Инструмент образует канал на рабочем графике валютной пары, который состоит из трех линий. Центральная – обычная SMA 20. Две другие получены путем добавления и вычитания из средней двух стандартных отклонений. Рассмотрим работу индикатора Волны Боллинджера – стратегии и приемы торговли.

Полосы Боллинджера — стратегия для бинарных опционов

Полосы Боллинджера — один из самых популярных индикаторов технического анализа как на рынке Форекс, так и для бинарных опционов. Несмотря на то, что платформы последних на настоящем этапе не оснащены мощным функционалом, этот инструмент присутствует практически в каждом терминале каждого брокера. Тем не менее, предварительный анализ гораздо удобнее проводить в платформе МетаТрейдер. В чем преимущества индикатора?

Стратегия на основе полос Боллинджера – SMA и ВВ

Стратегия на основе полос Боллинджера “SMA и ВВ” предоставляет трейдерам возможность торговли на дневном и часовом графике любого актива. Используется всего 2 простых индикатора из стандартного набора МetaТrader4:

Стратегия на основе полос Боллинджера – RSI + BB

Стратегия на основе полос Боллинджера “RSI + BB” эффективно соединяет сигналы от двух индикаторов (полос Боллинджера и RSI), позволяя трейдеру уменьшить количество ложных сигналов. Давайте кратко рассмотрим характеристики обоих индикаторов, чтобы лучше понимать, почему их комбинация позволяет улучшить показатели торговли.

Стратегия на основе полос Боллинджера – BB + ZigZag

Стратегия на основе полос Боллинджера “BB + ZigZag” позволяет трейдеру торговать, комбинируя эти 2 индикатора, что увеличивает количество прибыльных сигналов. Для лучшего понимания сути стратегии рассмотрим, как работают оба индикатора. Полосы Боллинджера (ВВ) представляют собой 3 полосы – среднюю, нижнюю и верхнюю. Их стандартные настройки следующие: средняя – это Simple Moving Average (SMA), период 20, нижняя – SMA минус 2 СО (стандартных отклонения), верхняя – SMA плюс 2 СО. По сути, ВВ представляет собой коридор, при выходе цены за его границы трейдер может заключать успешные сделки.

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