Bollinger bands strategy is a popular system.
If you traders already have long-time experience in trading both forex and stocks, of course, are familiar with Bollinger bands strategy.
This strategy uses the Bolinger band indicator, of which John Bollinger created this indicator.
Even this strategy uses a lot, some make modifications and some use the default settings.
Bollinger bands strategy is also good besides other strategies with MACD or RSI and others.
In a wider application, Bollinger Band also calls as a volatility channel.
Which is a line above or below a fixed price line?
When used to calculate markets, Bollinger Bands provide a lot of information.
Such as ongoing trends or reversal trends, periods of consolidation, breakouts, and market volatility.
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Bolinger bands strategy indicator explained
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Bollinger Bands is one of the technical indicators with function to measure volatility and determine the direction of price movement trends.
In addition to determining the direction of the trend, this indicator has the function to determine the state of overbought and oversold.
Characteristics, in sideways (ranging) market conditions, prices move between the two bands, upper band, and lower band.
Bollinger Bands consist of three lines or waves that are around a simple moving average (SMA) line.
The top line shows statistically high or higher prices, while the bottom line shows low prices.
In general, Bollinger Bands are always correlated with the level of volatility.
Bollinger bands strategy calculation formula
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In the Bollinger bands strategy, the Bollinger Bands indicator consists of a Simple Moving Average (SMA) with two bands above and below the SMA line.
The top band is called the Upper Bollinger Band and the bottom band is called the Lower Bollinger Band.
Upper and Lower Bands are determined based on the addition and subtraction of SMA values to the standard deviations.
Whereas the standard deviation measures the volatility to what extent the price can move from the true value.
Here is formula calculation Bollinger band
Upper Band = SMA (n) + k * Standard Deviation (n)
Lower Band = SMA (n) – k * Standard Deviation (n)
n = measurement period (default: 2)
Because taking count volatility measurements, the two bands will move according to market conditions.
Bollinger Bands is a popular indicator, we can find in many trading platforms, including Metatrader4 (MT4) and Metatrader5 (MT5) with default parameters SMA: 20 periods, and standard deviations: 2.
To attached into the chart, look for the Insert -> Indicators -> Trend >-> Bollinger Bands, the chart below shows a Bollinger band indicator.
To determine the direction of the trend, you can look at the middle line of Bollinger bands, because this is SMA 20 if the trend is down this indicator will be pointing down, otherwise, if the trend is up, it will be pointing up.
Meanwhile, to determine overbought is if the price has touched the Upper Band, but the closing price (Close) is still below the Upper Band.
Conversely, to determine the oversold if the price has touched the Lower Band, but the closing price still closed above the Lower Band.
Bollinger band trading rules
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By the maker of the Bollinger band indicator named John Bollinger, the use of this indicator has rules which are the way of trading with this indicator.
There are 22 rules mentioned, and it is important information to use this Bollinger band indicator.
These Rules is
- Bollinger Bands give signals that are relative to high and low prices. According to John Bollinger prices are high when prices are in the upper band and prices are low if the price near the lower band.
- With a look at relative prices, it becomes a consideration for comparing prices and indicators to determine to buy and sell decisions strictly.
- To get accurate indicators by looking at momentum, volume, sentiment, open interest, inter-market data, etc.
- If you use more than one indicator it should not be directly related to each other. For example, momentum indicators might provide signals that complement the volume indicators, but using these two types of momentum indicators should be avoided.
- Bollinger Bands in its application to determine/classify pure price patterns such as superiors “M” and subordinates “W”, shifting momentum, etc.
- A band sign is not a signal. The Upper Bollinger Band is not a sell signal and the sign lower Bollinger Band is not buying signal.
- In market trends, prices can rise above the Bollinger Band and fall to the lower Bollinger Band.
- Closing prices outside of Bollinger Bands is initially a continuation signal, not a reversal signal, this is the basis for many successful volatility breakout systems.
- The default parameters are the period 20 for moving averages and standard deviation value is two, this calculation for the default bandwidth. The actual parameters required for certain markets may differ.
- The middle Bollinger Band shouldn’t be the best for crossovers. Instead, it gives an overview of medium-term trends.
- If the Moving Average is extended, the number of standard deviations needs to be increased; from 2 in 20 periods to 2.1 in 50 periods. Likewise, if the moving average is shortened the number of standard deviations must be reduced; from 2 in 20 periods to 1.9 in 10 periods.
The next rules
- Traditional Bollinger Bands are based on simple moving averages because they are used in calculating standard deviations and want to be logically consistent.
- Exponential Bollinger Bands eliminate sudden changes in bandwidth due to large price changes that occur. Exponential averages must be used for BOTH middle bands and in the calculation of standard deviations.
- It is not recommended to make statistical assumptions based on the use of standard deviation calculations in the tape construction. Abnormal price distributions and typical sample sizes in most Bollinger Bands placements are too small for statistical significance.
- % b provides information about where it is related to Bollinger Bands. Positions in the tape are calculated using the formula adaptation for stochastics.
- % b has many functions including identification of divergences, pattern recognition and coding of trading systems using Bollinger Bands.
- Bollinger bands can be normalized by% b, removing the fixed threshold in the process. Use Bollinger Bands period 50 or longer on the indicator then calculate% b of the indicator.
- Bandwidth tells you how wide Bollinger Bands are. The width normalized using the middle band, standard parameters, BandWidth is four times the coefficient of variation
- The most popular use of broadband is to identify “The Squeeze”, but also to identify changes in trends.
- Bollinger Bands may use for analysis on various types of finance, including equities, indices, foreign exchange, commodities, futures, options, and bonds.
- Bollinger Bands can be used for various timeframes, M5, H1, Daily, Weekly, etc. The key is that the bar must contain enough activity to provide a strong picture of the mechanism of price formation.
- Bollinger Bands don’t always give advice signals, it helps identify opportunities that might benefit you.
Bollinger bands strategy settings
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In its application, the Bollinger band indicator can modify the standard deviation to obtain a different bandwidth.
Some traders use double Bollinger bands strategy to get the best setup in conducting market analysis.
The way to use this double BB strategy is that you attach two BB indicators, both of which use the same period of 20, but you enter a different deviation, one BB is filled with number 2 and one other BB indicator is filled with number 1.
You should use a different color for each BB, so can easily recognize each BB.
Using two BB with the same period 20 and different deviation hence we can get like as the image below.
When the chart is set, then the trader needs to mark each zone.
- A1: The top line of Bollinger Band is deviation 2 which is far from the X line, which is the period 20 SMA.
- B1: upper line of Bollinger Band with a deviation of 1 from the SMA period 20.
- X: is an SMA period 20 that acts as the centerline of the Bollinger Band and at the same time the basis for determining the location of other lines.
- B2: Bollinger Band’s bottom line with deviation 1 of the SMA 20.
- A2: Bollinger Band’s bottom line with a deviation of 2 from the SMA 20.
This line represents four different trading zones to enter the market.
When the price is in the top line area (or between two lines A1 and B1), this indicates that the uptrend is strong, and there is a big chance the price will continue to rise.
As long as the candlestick shows the price in the upper line area, buy positions are recommended.
When the price is in the lower area (or between the two lines A2 and B2), the downtrend is likely to continue.
This is indicated by the candlestick closing in the lower area, and the trader must immediately take a short position.
When prices are in the area defined as a standard deviation (B1 and B2), then there is no trend occurring and prices will fluctuate so that a range occurs.
Period 20 (X) SMA will act as the baseline of the Bollinger Band and be in the middle area.
Bollinger bands and RSI
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This forex strategy we use two indicators as a help tool and multi-timeframe, RSI and Bollinger band.
The RSI indicator has the quality to identify trends.
This is a good strategy, if the indicators are combined, they can certainly have a strategy with high profitability.
An indicator that used is
- Relative Strength Index with the default setting.
- Bollinger Bands with a default setting
- The time frame used is 4H and 30min. (if you are a scalper, you can use 30min and 5min time frames).
When the RSI is above the 70 levels and the price breaks above the upper Bollinger bands line.
When the RSI is below level 30 and the price breaks below the lower of Bollinger bands line.
- If you trade with M15 target around 5-20 pips.
- Trading on M30 target around 15-30pips.
- Trade on H4 target around 20-60 pips.
- Daily timeframe target 30-50 pips.
5 pips below the candlestick when open or the middle line of Bollinger bands. You can also use if RSI close to level 50 you can immediately cut loss.
Bollinger band reversal signal
Bollinger Bands are quite accurate in showing reversal signals.
Usually, a valid reversal signal occurs when the candlestick crossing one of the Bollinger bands, upper band or lower band, then followed by a candle of a different color which indicates the reversal signal.
The image above shows candle 1 is a bearish candle that pierces the lower band and closes outside the lower band curve.
But candle 2 is a bullish candle (blue) that covers the body and almost all shadows candle 1. Both candles form a piercing line.
The piercing line that breaks the lower band BB is a strong and valid uptrend signal.
Whereas the piercing line formed on the upper band called the dark cloud cover is a strong and valid downtrend signal.
False reversal signals
False reversal signals are formed in the upper band or lower band, and usually, traders think the trend will immediately reverse direction.
But what happens instead is the continuation of the direction of the trend.
But in reality a trend that moves strongly is not easy to reversal, what happens is a correction or a retracement.
To avoid false signal conditions, when a strong trend occurs then ignore weak reversal signals in the first and second candles.
The example above, is the reversal signal at point 2 is weaker (seems shorter) than the candlestick bar point 1 even though it crosses the upper band.
The strength of a trend can be seen from the angle of its slope, the sharper the slope the stronger the trend.
Bollinger band bitcoin
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In its application, Bollinger band indicators are not only for forex and stock analysis but also many Crypto traders or Bitcoin traders who use Bollinger band indicators to analyze Bitcoin markets.
How to use Bollinger band indicators for Bitcoin analysis or cryptocurrency is also the same as how to use Bollinger band analysis on forex and stocks.
But in practice it is still rare for Bitcoin traders to use Double BB for market analysis, most still use one BB with default settings.
By learning the functions and ways to use Bollinger bands, you can practice for cryptoanalysis.
The more experience you will understand the character of BB indicators against price behavior.
Bollinger band indicator is one of the best among many indicators, which makes is John Bollinger who has more than 30 years experience in the financial business.
This indicator can be combined with other indicators, RSI and/or price action.
In addition, this indicator is widely used for stock analysis, forex, and crypto.
On the other hand, when looking at the advantages, traders still need risk management in practice, this is as a form of anticipation when making a mistake decision.
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