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Trading With Bollinger Bands
Alex

LEVEL 10 : SENIOR

REVIEWS 9 | REPLIES 84

#2708

Alex

October 13, 2015 at 5:33 pm

Bollinger Bands is a Technical Analysis tool which was created by John Bollinger in the 1980s. He then also trademarked the term in 2011. If you look at John’s surname, it’s quite obvious where the term originated from. Most of you have probably seen charts with Bollinger Bands on. That’s because it’s one of the most famous and readily available indicators around. Bollinger Bands have since become a popular indicator amongst Binary Options traders.

What Is Bollinger Bands?

Bollinger Bands are best described as a map of price volatility which consists of three parts, namely:

  1. Upper band
  2. Moving average (middle band)
  3. Lower band

Bollinger-bands-indicator-mt4

Figure 1 – Example of Bollinger Bands

The typical value for the moving average will be set at 20 periods. A simple moving average is generally used with Bollinger Bands because the standard deviation also uses simple moving averages in the calculation formula. The upper and lower bands are usually set at 2 standard deviations above and below the moving average (middle band). These settings can be adjusted to suit your trading style or the characteristics of the asset you are trading. John Bollinger recommends making small adjustments to the standard deviation. When you change the moving average period, you also have to change the standard deviation multiplier. Here are a few settings that you can play with:

  • 20-period moving average with the standard deviation set to 2
  • 50-period moving average with a standard deviation set to 2.1
  • 10-period moving average with a standard deviation set to 1.9

How To Use Bollinger Bands

Bollinger Bands will show you the market volatility at any given time. Volatility is based on the standard deviation, which changes as volatility decreases or increases.

3 Steps to Interpret Bollinger Bands:

  1. Notice the Bollinger Bands shape – The upper and lower bands will contract (move closer to moving average) when volatility decreases, and the bands will expand (move further away from moving average) when markets become more volatile.
  2. Notice the direction of the Bollinger Bands – The bands can take three directions, namely sideways, upwards and downwards. Sideways bands mean that the market is currently in a trading range. When the bands are pointing upward, the market is in an uptrend. Bands that are pointing down will show a downtrend taking place.
  3. Notice the location of price within the Bollinger Bands – When prices are touching the upper band, the market is thought to be overbought; conversely, when prices are touching the lower band, the market is thought to be oversold.

How To Add Bollinger Bands To Metatrader4 (MT4)

Most charting platforms will have the option to add the Bollinger Bands indicator to a chart. In order to add this indicator to your chart in MT4, you need to click “Navigator > Indicators > Bollinger Bands”. You can keep the default settings as is or you can change them as you wish.

Trading Using Bollinger Bands

Before we begin discussing Bollinger Bands trading strategies, you need to know that there are countless ways how you can use them in your trading plan. I will only discuss a few popular ways how Bollinger Bands are used by most Technical analysts. Don’t let these examples stop you from trying other strategies with Bollinger Bands; who knows, you just might find the winning strategy you have been searching for. Let’s get on to some trading strategies

Bollinger Bands Bounce

The Bollinger Band Bounce is the most popular way to use the indicator for Binary Options. In order for this strategy to work you need the market to be trading in a range (sideways market). If you try trading this method in a trending market, you will probably lose most of your trades. The whole idea behind this strategy is that outer bands will act as dynamic support and resistance. The price will bounce off of these bands and return to the middle of the bands. These bands tend to be much stronger on higher time frames.

metatrader4-indicator

Figure 2 – Price Bounces From Upper and Lower Bands

In Figure 2 above we could see that the market was trading inside a range. We added support and resistance lines for extra confirmation. Once the lines were drawn in it was just a matter of waiting for the price to touch the Bollinger Band and the support or resistance levels. We had two pretty straight forward Put trades at the red arrows and one price action Call trade represented by the green arrow.

Bollinger Band Squeeze

The Bollinger Band Squeeze is a type of breakout strategy. The name of the strategy pretty much sums it up. When the Bollinger Bands squeeze together, it’s usually a sign that a breakout might occur. If the candles break out below the lower band, the market will often develop into a downtrend. If the candles breakout above the upper band, the market will usually carry on with the uptrend. When the breakout happens, you will see the bands start widening. After the breakout occurs, you have to start looking for trades on the market pullbacks. These setups don’t occur very often, but when they do they work like a charm.

mt4-indicator

Figure 3 – Bollinger Bands Squeezes And Candle Breaks Out Above The Upper Band

This is a near perfect example of a Bollinger Band Squeeze trade. The market has little volatility which causes the Bollinger bands to compress. Suddenly we see a huge bullish bar that closes above the upper band. This is a good sign that the market might start trending upwards. Now we wait for a pullback to enter with the momentum of the trend. You can see that the market gave us a lovely entry at the green arrow on the chart. You also could have gone down a few timeframes which probably would have given you a few more entry opportunities.

Bollinger Band Trend Trading

Bollinger Bands can be quite useful to trade with the momentum of the trend. How do you know which way the trend is going? Well, firstly you will need to determine which way the Bollinger Bands are facing and whether the price is above or below the moving average (middle band). Once you have established the trend, you can take trades off of the moving average in a strong trend or from the opposite band in a weaker trend. Remember, you don’t have to explicitly take trades from these bands, you can focus on other entry methods too like candlestick patterns for example.

bb-indicator

Figure 4 – Bollinger Bands Facing Up and Price Is Above Moving Average

In Figure 4 we know that the market is in an uptrend because the Bollinger bands are pointing upwards, and the price is above the moving average (middle band). On the above chart, we can see two straight forward Call trades from the middle band and two Call trades from the lower band. When the price touches the lower band in an uptrend, it is a sign that the trend is starting to weaken. When you see this happen, you need to be careful taking any further Call trades until you have confirmation that the trend is still going up.

Conclusion

Bollinger Bands are a great all around indicator to use. It works in both ranging and trending markets. Most traders use Bollinger Bands in conjunction with other indicators to add to the confluence of their trades. Bollinger Bands are known as an Oscillator type of indicator. Traders prefer to use non-oscillator type indicators (such as trendlines, support and resistance levels, supply and demand zones) with Bollinger Bands. Like we discussed, there are various ways that you can use Bollinger Bands to trade with so let your imagination run free!

Caleb Singleton

LEVEL 1 : NEWBIE

REVIEWS 1 | REPLIES 2

#2781

Binarysword

October 21, 2015 at 8:25 pm

Bollinger bands have always intrigued me for some reason. This article has helped me develop a deeper understanding of how they work and how to trade them in more ways than I thought was possible.

Ernest Simpson

LEVEL 1 : NEWBIE

REVIEWS 2 | REPLIES 2

#2782

Bart

October 22, 2015 at 12:15 pm

Lovely trading examples… they don’t get much better than that! I see setups like these all the time.

Claude Ward

LEVEL 1 : NEWBIE

REVIEWS 1 | REPLIES 1

#2783

Koning

October 23, 2015 at 10:03 am

I’m a big fan of trading with BBs. It is such a flexible indicator to use. I look for the BB squeeze which was explained in the article. I will enter once the breakout happens or if I see the market starts trending I will trade the pullbacks to the middle line of the BB.

I have found that trading bounces of the upper and lower band doesn’t work that well. I think it could be the session in which I trade. A slower session like the Asian one will definitely work much better trading the bounces.

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