In such markets, Bollinger Bands can be used as a trend-following indicator.
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In strong and prolonged trending markets, Bollinger Bands usually slope in the direction of the trend. The idea in a trending market is to find easy ways to join or enter the dominant trend. This means finding quality price points after a retracement or pullback in the market.
5 Bollinger Bands Trading Strategies You Should Know
The middle and lower bands will provide great price points for entry targets when there is a retracement or pullback in the market. In a downtrend, traders will look to enter trades at the middle or upper bands after a retracement or pullback. All its bands highlight valuable price areas in the market. But this naked information can be complemented with the trade signals provided by the MACD or the RSI, an indicator that will show trend strength and momentum at the value price areas.
For instance, in an uptrend, traders can place buy trades in the middle and lower bands when the RSI delivers oversold signals. The RSI can also give validation during breakouts by showing whether there is enough momentum for any resulting move to be sustained. This is done by observing the centreline. If, for instance, the price breakouts below the lower band, a solid signal to sell will be given by the RSI when the indicator falls below the line to signal increasing bearish momentum in the market.
This is usually done by using the double Bollinger Band strategy. This involves using two Bollinger Bands on your chart: the first is the default indicators the middle 20 SMA and 2 standard deviations , and the second one is the default 20 SMA but with 1 standard deviation SD. Using this strategy there are three interest zones generated: the buy zone, the neutral zone, and the sell zone. The buy zone is the area between the first upper SD and the second upper SD — it is located above the middle band.
When the price is in the buy zone, it is a signal to go long. The neutral zone is the area between the upper first SD and the lower first SD. It is the area covered by the secondary Bollinger Bands. When the price is in the neutral zone, it is basically directionless, and traders should not look to place any orders in the market. The sell zone is the area between the first lower SD and the second lower SD — it is located below the middle band.
When the price is in the sell zone, it is a signal to go short. In a trending market, traders can look to exit their trade positions when prices retrace to breach the middle band or break into the opposite zone. For instance, in an uptrend, traders can maintain a long bias as long as prices are in the buy zone.
How to Use Bollinger Bands for Trading
A long position can be liquidated when prices fall below the middle band or break into the sell zone. In a strong trend, the mid-line can be used as a reference point for placing trailing stops. The fact that Bollinger Bands adjust well to volatile market conditions, makes it one of the most important technical indicators for options trading.
Option traders refer to these low-volatility periods as consolidations. A big benefit of using the Bollinger Band indicator is that it is visually very easy to identify periods when the market is more likely to break out in the near term. The main benefits of this is that it enables options traders to control the risks present in the market , while also providing the ability to pinpoint potentially profitable trading opportunities.
Bollinger Bands squeezes and expansions imply low price volatility and high volatility respectively. This makes Bollinger Bands efficient trading indicators for volatility plays in the options market, where traders can apply long straddles and strangles when they expect high volatility in the market, or short straddles and strangles when they anticipate low volatility.
Cryptocurrencies are an exciting new financial asset to trade online. Traders can also use Bollinger Bands as one of the indicators that can help them trade effectively in the crypto space. As a result, traders will closely observe the contraction and expansion between the lower and upper Bollinger Bands. Cryptocurrency traders can position themselves accordingly when Bollinger Bands squeeze in anticipation of high volatility in prices of their favourite crypto coins and tokens.
For crypto traders, this is a sign to buy. This approach can be used to trade a wide range of cryptocurrencies on the AvaTrade platforms, including Bitcoin, Ethereum, Litecoin, and many others. It is important to note that the bounce or reversal strategy can also be applied to cryptocurrency trading.
That is, you can prepare for a price reversal when the price approaches the upper Bollinger band in a bullish trend, or the lower Bollinger band in a bearish trend. In many cases, it is important to understand that just because the price hits the respective Bollinger bands, this does not indicate oversold or overbought conditions. To verify this information, this approach needs to be combined with other technical indicators that will help the trader narrow down the best possible reversal points.
Traders can develop their cryptocurrency trading strategies using Bollinger Bands, moving averages, the RSI, and oscillators. While a combination of indicators will not necessarily provide perfectly accurate reversal points, they can help to narrow down the potential reversal points. Gaining knowledge of how Bollinger Bands work can really boost your trading accuracy, and hands-on experience is the best way to familiarize yourself with this indicator. This involves opening a trading account with the multi-regulated and award winning AvaTrade and then testing Bollinger Bands and other technical indicators and tools that are available on our platforms.
Another major benefit is that AvaTrade provides you with direct access to a wide choice of assets including forex trading , stocks, cryptocurrencies, and indices trading. To assist traders on their trading journey, AvaTrade offers access to a free demo trading account. A demo account enables a trader to test the trading platform and the available indicators and tools without the risk of losing any money. This is the ideal environment to test Bollinger Bands and how they can effectively be added to your trading strategy. None of the content provided constitutes any form of investment advice.
Still don't have an Account? Sign Up Now. Bollinger Bands Trading Strategies. What is Arbitrage? What is Liquidity? Initially there is a wave lower, which gets close to or moves below the lower band.
When the price moves above the high of the prior pullback the W-Bottom is in place. A long trade is initiated and a stop is placed below the recent lows. The W-Bottom is similar to a Double Bottom chart pattern. One potential profit target is to add the height of the W-bottom to the breakout price. If a major uptrend unfolds, a trailing stop can be used to attempt to capture more profit from the rally.
Initially there is a wave higher, which gets close to or moves above the upper band. When the price moves below the low of the prior pullback the M-Top is in place. A short trade and exit long positions is initiated and a stop is placed above the recent highs. The M-Top is similar to a Double Top chart pattern. One potential profit target is to subtract the height the M-Top from the breakout price. If a major downtrend unfolds, a trailing stop can be used to attempt to capture more profit from the short position.
Bollinger Bands are a helpful indicator, but they have a number of limitations. Bollinger Bands are derived from a simple moving average, which is the average price over a certain number of price bars.
Bollinger Bands: The Complete Guide by John Bollinger | IG UK
Bollinger Bands are reactive, not predictive. Active traders may want a small number of periods or lower standard deviation, while long-term traders may prefer a greater number of periods and a greater standard deviation, so few signals are presented. By adjusting the settings though it may be more difficult to gauge the trend based on the guidelines or spot W-Bottoms or M-Tops.
M-Tops and W-Bottoms may not actually end up not being reversals, but rather just consolidations where the price continues to head in the trending direction after a false breakout. A false breakout is when the price passes through the entry point, initiating a trade, but then quickly moves back in the other direction resulting in a loss.