Bollinger bands strategy: Bollinger Bands Trading Strategies- How to Use it?

When high volatility comes into the market, the upper and lower bands of the Bollinger Bands will diverge or broaden. A bullish breakout in the market will occur when the upper band of the indicator is breached. Similarly, a bearish breakout will typically be confirmed by the breach of the lower band.

This indicator still serves the same purposes as it does in other financial instruments, which is to indicate volatility in an asset’s price. 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.

Using Bollinger Bands to show reversals

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. As can be observed, Bollinger Bands is a powerful indicator, and it can be said that it was designed to “contain price”.

Because in trending markets, the market can remain “cheap” or “expensive” for a long period of time. It is a buying channel because the spot rates displayed have a higher moving average which suggests an upward momentum. On the other hand, the area between the moving average line and the line below is known as the buying channel because they trade below the moving average. Traders and long-term investors use technical, fundamental, and sentimental analysis to identify entry and exit positions. They do this with a view of entering and exiting the trades at the right time.

She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. One technical indicator is not better than the other; it is a personal choice based on which works best for the strategies being employed. Market Rebellion’s reference to specific securities or Digital Assets should not be construed as a recommendation to buy, sell or hold that security or Digital Asset. Specific securities or Digital Assets are mentioned for educational and informational purposes only. Investors are fully responsible for any investment decisions they make.

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.

Indicators to combine with Bollinger Bands

Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. Market Rebellion is not giving investment advice, tax advice, legal advice, or other professional advice. The price hit the Bollinger Band, the RSI needs to be between 50 and 30. If it is not here, and let’s just say it was at the 80 mark, then you wouldn’t be interested in trade. This means that we’ll have two additional bands above and below the central band.

Following the strategy, technical traders would enter their buy orders for NYX on June 13. The Kairi Relative Index is a technical analysis indicator used to indicate potential buy and sell points based on overbought or oversold conditions. A moving average is a technical analysis indicator that helps level price action by filtering out the noise from random price fluctuations. One of the more common calculations uses a 20-day simple moving average for the middle band. The upper band is calculated by taking the middle band and adding twice the dailystandard deviationto that amount.

Using Bollinger Bands to Gauge Trends

Watch our free 7-minute tutorial on how pro traders harness unusual option activity. This means that about 90-95% of price movements will occur within this range. First off, we want to thank you from the bottom of our hearts. If you are looking for something specific you can always head on over to our TSG Blog Articles Page.

Option traders refer to these low-volatility periods as consolidations. They will then place their trades in line with the new price trends that form when the asset’s price breaks out and volatility is present in the market. Trading breakouts with Bollinger Bands is very effective because of the risk/reward opportunity. Generally, a tighter squeeze is likely to lead to a stronger breakout.

If the candles start to break out above the TOP band, then the move will usually continue to go UP. In our crypto guides, we explore bitcoin and other popular coins and tokens to help you better navigate the crypto jungle. A pullback refers to the falling back of a price of a stock or commodity from its recent pricing peak.

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This is the exact scenario this strategy attempts to profit from. The strategy calls for a close below the lower band, which is then used as an immediate signal to buy the stock the next day. To use this strategy, traders look for trends and enter a position in the direction of the trend when the price reaches the moving average or the opposite band.

In addition, the area between the moving average line and the above line is the buying channel. The concept of Bollinger bands come from Standard Deviation, which is a statistical calculation or unit that measures the dispersal pattern of any data. It includes about 68 per cent of all data points for the normal distribution pattern.

What are the benefits of using the Bollinger Bands Bounce trading strategy?

For example, when the price is in an uptrend, traders can enter a long position when the price reaches the moving average or the lower band. Conversely, when the price is in a downtrend, traders can enter a short position when the price reaches the moving average or the upper band. The Bollinger Bands Bounce trading strategy can help traders identify potential buying and selling opportunities based on the price movements of an asset. This can be particularly useful in volatile markets where assets tend to move quickly and unpredictably. Interestingly, Bollinger Bands are able to capture about 90% of the price action in a given asset or cryptocurrency.

This is a strategy that involves buying when other traders are buying and selling when others are selling . It involves jumping into the bandwagon of an already-existing trend. Just like in the previous example, there was still selling pressure on the stock.

As well, the longer the squeeze, the stronger the anticipated breakout. When opening a breakout trade using Bollinger Bands, a stop loss is placed outside the opposite band of the prior squeeze. For instance, if the asset price breaks upwards, the stop loss for the buy trade position will be placed outside the lower band during the squeeze. When used as a momentum tool, Bollinger Bands can be used to identify overbought and oversold conditions in the market.

I use the 1 hour chart for trading and 4 hrs for trend confirmation. When the outer bands are curved, it usually signals a strong trend. I find it easy using my phone than my laptop, problem is, on my phone there’s only the middle moving average and don’t know how to set up the outside ones.

However, you can adjust the settings to fit your trading strategy by changing the period, standard deviation, and SMA type. This is a case where the selling continued in the face of clear oversold territory. During the selloff there was no way to know when it would end. There are multiple uses for Bollinger Bands®, including using them for overbought and oversold trade signals. Traders can also add multiple bands, which helps highlight the strength of price moves.

The difference between the two is that Keltner channels use the Average True Range during its calculation while Bollinger Bands uses standard deviation. A bearish signal emerges when the price moves below the middle line of the bands. Ideally, you can predict when a breakout is about to happen by looking at the formation of the Bollinger Bands. When the bands are squeezed, it is often a sign that a breakout will happen.

Aside from how the bands/channels are created, the interpretation of these indicators is generally the same. A trader can visually identify when the price of an asset is consolidating because the upper and lower bands get closer together. After a period of consolidation, the price often makes a larger move in either direction, ideally on high volume. Expanding volume on a breakout is a sign that traders are voting with their money that the price will continue to move in the breakout direction.