Bollinger Bands: Two Great Trading Strategies

Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. The authors did, however, find that a simple reversal of the strategy (“contrarian Bollinger Band”) produced positive returns https://trading-market.org/ in a variety of markets. The chart thus expresses arbitrary choices or assumptions of the user, and is not strictly about the price data alone. In intraday trading, I recommend using channel strategies in combination with Bollinger bands on small timeframes. If you are a beginner, it is recommended to consider trending strategies with a horizon of at least a few days.

• And if the price falls and stops at the lower bands, the result of the above formula will be 0.
• This statement is the essence of the Bollinger Squeeze strategy.
• I marked the second spike with an arrow which was a trend continuation signal as price failed to break higher during the downtrend.
• A much easier way of doing this is to use the Bollinger Bands width.
• They can be used to read the trend strength, to time entries during range markets and to find potential market tops.

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. Then, at regular intervals, the stop loss is pulled up by the price movement distance. Such intervals will be different for each of the timeframes. In daily charts, the optimal nudge time would be the opening of trades at the beginning of the day. You can also use the trailing stop, which changes the stop loss value at the close of each candle.

Bollinger Bands Squeeze Strategy

By default, the Bollinger Bands ® are set to 2.0 Standard deviations which means that, from a statistical perspective, 95% of all the price action happens in between the channels. A move close to the, or outside of the outer Bollinger Bands ® shows a significant price move – more on that later. Some traders prefer to use an alternate version of the trending strategy that uses MACD instead of MFI. This indicator shows really good results on some instruments. So if you want to find the ideal trading method for several of the most commonly used currency pairs, it makes sense to test the strategy with both MFI and MACD. One such trading system is the Bollinger Band breakout strategy.

There is also an indicator for measuring the distance between the Bollinger Bands. Appropriately, this indicator is called Bollinger BandWidth, or just the BandWidth indicator. It is simply the value of the upper band less the value of the lower band. Understandably, stocks with higher prices tend to have higher BandWidth readings than stocks with lower prices. If price equals 100 and BandWidth equals 5, then BandWidth would be 5% of the price. If price equals 20 and BandWidth equals 1, then BandWidth would also be 5% of price.

What is the Ideal Bollinger Bands Settings?

You need to see that the trend is moving upwards, in this case, before you enter a trade. In theory, Bollinger Bands will contain all trading activity that occurs within 2 standard deviations of the expected norm (the trend line). It’s important to know that most prices are contained within one and two standard deviations.

• If the price is at lower Bollinger Bands, then you can look for bullish RSI divergence to indicate strength in the underlying move.
• This phenomenon can also be used as a signal for the end of market consolidation.
• After a period of consolidation, the price usually tends to make a larger move in either direction, ideally on high volume.

Therefore, the increase in volume occurs at the stage of the lowering of the right shoulder. In the first part of the last spike, the high volume can be explained by the struggle between bulls still hoping for growth and bears confident of the fall. After passing the peak, massive sales continue at the expense of traders, who at the last moment realized that further growth is impossible.

Bands Help Identify Ranges

It’s another thing to size up one stock from another in terms of how it will respond to the bands. You would need a trained eye and have a good handle with market breadth indicators to know that this was the start of something real. It was very subtle, but you can see how the bands were coiling tighter and tighter from September through December. Essentially, you have an actual reading of the volatility of a security. You can then look back over months or years to see if there are any repeatable patterns of how price reacts when it hits extremes.

The captain obvious reason for this one is due to the unlimited trading opportunities you have at your fingertips. One of the first indicators I put to the test was Bollinger Bands. Instead of taking the time to practice, I was determined to turn a profit immediately and was testing out different ideas.

Build a Bollinger Bands and RSI Trading Strategy Using Python

Developed by John Bollinger in the 1980s, Bollinger Bands are commonly applied to various financial instruments, including stocks, commodities, and currencies. Because the Bollinger Band Squeeze does not provide any directional clues, chartists must use other aspects of technical analysis to anticipate or confirm a directional https://forex-world.net/ break. In addition to basic chart analysis, chartists can also apply complimentary indicators to look for signs of buying or selling pressure within the consolidation. Momentum oscillators and moving averages are of little value during a consolidation because these indicators simply flatten along with price action.

Another possibility was to exit the market once the price touched the middle line again (5). As for the stop-loss order, the trader could have placed it slightly above the highs before the price moved below the middle line (6). Usually, all three signals are combined and used in one trading strategy. The theory says that buyers prevail in the market when the price rises above the middle line; when the price falls below the middle line, sellers take control of the market. It doesn’t mean that a fall below the middle line will form a strong downtrend, but the price is expected to fall for at least some time. Aside from volatility, the indicator reflects entry and exit points and determines price direction.

Rules for Bollinger Bands Bounce Trading Strategy

Usually, the original settings of an indicator are based on the daily chart. This means that a 20 SMA represents the moving average of 4 weeks since traditional markets are only open 5 days out of 7. The original settings create bands that show 95% of price action inside them.

Above is an example of the double bottom outside of the lower band which generates an automatic rally. On the secondary test, TRCH tested a new low with a 40% drop in traffic from the last swing low. Also, the candlestick struggled to close outside of the bands. Many Bollinger Band technicians look for this retest bar to print inside the lower band.

However, from experience, the traders that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. Now, looking https://day-trading.info/ at this chart, you may feel a sense of boredom overcoming you. That’s because it’s far more entertaining to tell yourself and others you crushed a 20% day trade in one day.