Tops and Bottoms on Bollinger Bands Strategy

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The Basics of Bollinger Bands®

In the 1980s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it.   Unlike a percentage calculation from a normal moving average, Bollinger Bands® simply add and subtract a standard deviation calculation.

Standard deviation is a mathematical formula that measures volatility, showing how the stock price can vary from its true value. By measuring price volatility, Bollinger Bands® adjust themselves to market conditions. This is what makes them so handy for traders; they can find almost all of the price data needed between the two bands.

Understanding a Bollinger Band®

Bollinger Bands® consist of a centerline and two price channels (bands) above and below it. The centerline is an exponential moving average; the price channels are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction).

A stock may trade for long periods in a trend, albeit with some volatility from time to time. To better see the trend, traders use the moving average to filter the price action. This way, traders can gather important information about how the market is trading. For example, after a sharp rise or fall in the trend, the market may consolidate, trading in a narrow fashion and crisscrossing above and below the moving average. To better monitor this behavior, traders use the price channels, which encompass the trading activity around the trend.

We know that markets trade erratically on a daily basis even though they are still trading in an uptrend or downtrend. Technicians use moving averages with support and resistance lines to anticipate the price action of a stock.

Upper resistance and lower support lines are first drawn and then extrapolated to form channels within which the trader expects prices to be contained. Some traders draw straight lines connecting either tops or bottoms of prices to identify the upper or lower price extremes, respectively, and then add parallel lines to define the channel within which the prices should move. As long as prices do not move out of this channel, the trader can be reasonably confident that prices are moving as expected.

Bollinger Bands: The Ultimate Guide Part 1

Bollinger bands is one of my favorite indicators for a very long time now because in my opinion is one of the best indicators out there. It can be used in my different ways but for some reason a lot of traders never go familiar with it. I have used different sources in order to gather as much information as possible and make these two articles as complete as possible. I also have two webinars which I highly recommend you to check out to find out some of my ways and secrets on this indicator which I didn’t include in this article. Watch “The Bollinger Bands Secrets Webinar” and here you can watch “The Band to Band Move in Bollinger Bands” .

Bollinger Bands Introduction

Bollinger Bands are applied directly to price charts, providing a gauge for how strong a trend is, and spotting potential bottoms and tops in stocks prices. Band width fluctuates based on volatility; the ability for Bands to adapt to changing market conditions makes it a popular indicator amongst traders. To use Bollinger Bands effectively, we must understand how they work, their trading applications, and pitfalls.

What are the Bollinger Bands?

Bollinger Bands® are a volatility based indicator, developed by John Bollinger, which have a number of trading applications.

There are three lines that compose Bollinger Bands: A simple moving average (middle band) and an upper and lower band. These bands move with the price, widening or narrowing as volatility increases or decreases, respectively. The position of the bands and how the price acts in relation to the bands provides information about how strong the trend is and potential bottom or topping signals.

Bollinger Bands are used on all timeframes, such as daily, hourly or five-minute charts. Bollinger Bands have two adjustable settings: the Period and the Standard Deviation. The Period is how many price bars are included in the Bollinger Band calculation. The number of periods used is often 20, but is adjusted to suit various trading styles.

The Standard Deviation is typically set at 2.0, and determines the widths of the Bands. The higher the Standard Deviation, the harder it will be for the price to reach the upper or lower band. The lower the Standard Deviation the easier it is for price to “breakout” of the Bands.

Bollinger Bands denoted (20,2) means the Period and Standard Deviation are set to 20 and 2, respectively.

The indicator is calculated using the following formula. First calculate the Middle Band, then calculate the Upper and Lower Bands.

  • Middle Band = 20-day simple moving average (SMA).
  • Upper Band = 20-day SMA + (20-day standard deviation of price x 2).
  • Lower Band = 20-day SMA – (20-day standard deviation of price x 2).

Where SMA = the sum of closing prices over n periods / by n.

Figure 1 shows how Bollinger Bands looks on a chart as they move and adapt with price.

22 Bollinger Band Rules

  1. Bollinger Bands provide a relative definition of high and low. By definition price is high at the upper band and low at the lower band.
  2. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
  3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
  4. If more than one indicator is used the indicators should not be directly related to one another. For example, a momentum indicator might complement a volume indicator successfully, but two momentum indicators aren’t better than one.
  5. Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as “M” tops and “W” bottoms, momentum shifts, etc.
  6. Tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger Band is NOT in-and-of-itself a buy signal.
  7. In trending markets price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
  8. Closes outside the Bollinger Bands are initially continuation signals, not reversal signals. (This has been the basis for many succeuful volatility breakout systems.)
  9. The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the width of the bands are just that, defaults. The actual parameters needed for any given market/task may be different.
  10. The average deployed as the middle Bollinger Band should not be the best one for crossovers. Rather, it should be descriptive of the intermediate -term trend.
  11. For consistent price containment: If the average is lengthened the number of standard deviations needs. to be increased; from 2 at 20 periods, to 2.1 at 50 periods. Likewise, if the average is shortened number of standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10 periods.
  12. Traditional Bollinger Bands are based upon a simple moving average. This is because a simple average is used in the standard deviation calculation and we wish to be logically consistent.
  13. Exponential Bollinger Bands eliminate sudden changes in the width of the bands caused by large price changes exiting the back of the calculation window. Exponential averages must be used for BOTH the middle band and in the calculation of standard deviation.
  14. Make no statistical assumptions based on the use of the standard deviation calculatio in the construction of the bands. The distribution of security prices is non-normal and the typical sample size is most deplyments of Bollinger Bands is too small for statistical significance. (In practice we typically find 90%, not 95%, of the data inside Bollinger Bands with the default parameters)
  15. %b tells us where we are in relation to the Bollinger Bands. The position within the bands is calculated using an adaptation of the formula for Stochastics .
  16. %b has many uses; among the more important are identification of divergences, pattern recognition and the coding of trading systems using Bollinger Bands.
  17. Indicators can be normalized with %b, eliminating fixed thresholds in the process. To do this plot 50- period or longer Bollinger Bands on an indicator and then calculate %b of the indicator.
  18. BandWidth tells us how wide the Bollinger Bands are. The raw width is normalized using the middle band. Using the default parameters BandWidth is four times the coefficient of variation.
  19. BandWidth has many uses. Its most popular use is to indentify ‘The Squeeze., but is also useful in identifying trend changes…
  20. Bollinger Bands can be used on most financial time series, including equities, indices, foreign exchange, commodities, futures, options and bonds.
  21. Bollinger Bands can be used on bars of any length, 5 minutes, one hour, daily, weekly, etc. The key is that the bars must contain enough activity to give a robust picture of the price-formation mechanism at work.
  22. Bollinger Bands do not provide continuous advice; rather they help indentify setups where the odds may be in your favor.

A note from John Bollinger:

One of the great joys of having invented an analytical technique such as Bollinger Bands is seeing what other people do with it. These rules covering

the use of Bollinger Bands were assembled in response to questions often asked by users and our experience over 25 years of using the bands. While there

are many ways to use Bollinger Bands, these rules should serve as a good beginning point.

Finding tops and bottoms with Bollinger Bands

After setting your Bollinger Bands to 2.5 standard deviations, you will see that price reaches the outer bands less often. At the same time, the meaning of such signals becomes much more important because it shows significant price extremes.

We highly recommend combining the Bollinger Bands with the RSI indicator – it’s the perfect match. There are two types of tops that you need to know about:

1) Price spikes into the outer Bollinger Bands which get rejected immediately >> Reversal signal.

2) After a trend move, price fails to reach the outer Band as the trend becomes weaker. This signal is usually accompanied by an RSI divergence >> Continuation signal.

The screenshot below shows both scenarios: the first is the market top after a divergence – see how the trend became weaker and lost momentum and then eventually failed to reach the outer Band before reversing. I marked the second spike with an arrow – this was a trend continuation signal as price failed to break higher during the downtrend. The strong spike that was followed by a fast rejection showed that bulls lacked power.

In contrast to most other indicators, the Bollinger Bands are non-static indicators and they change their shape based on recent price action and accurately measure momentum and volatility. Thus, we can use the Bollinger Bands to analyze the strength of trends and get a lot of important information this way. There are just a few things you need to pay attention to when it comes to using Bollinger Bands to analyze trend strength:

  • During strong trends, price stays close to the outer band.
  • If price pulls away from the outer band as the trend continues, it shows fading momentum.
  • Repeated pushes into the outer bands that don’t actually reach the band show a lack of power.
  • A break of the moving average is often the signal that a trend is ending.

The screenshot below shows how much information a trader can pull from using Bollinger Bands alone. Let me walk you through the points 1 to 5:

1) Price is in a strong downtrend and price stays close to the outer bands all the time – very bearish signal.

2) Price fails to reach the outer band and then shots up very strongly, even showing an engulfing pattern. This is a classic reversal pattern where the bearish trend strength faded.

3) 3 swing highs with lower highs. The first swing high reached the outer band whereas the following two failed – fading strength.

4) A strong downtrend where price stayed close to the outer band. It tried to pull away, but bears were always in control.

5) Price consolidates sideways, not reaching the outer band anymore and the rejection-pinbar ended the downtrend.

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As you can see, the Bollinger Bands alone can provide a lot of information about trend strength and the balance between bulls and bears.

The role of the moving average

During trends, the moving average holds very accurately and a break of that moving average is usually a meaningful signal that the sentiment has shifted. The screenshot below shows nicely how price trended between the outer bands and the moving average both on the way up and down. During the trend, the moving average could have been used as a re-entry signal to add to existing positions during pullbacks.

Furthermore, the moving average can be used as a trade exit signal where a trader does not close his existing positions unless price has broken the moving average. By combining the Bollinger Bands with the moving average, a trader can already create a robust trading method.

You can see, the Bollinger Bands are a multi-faceted trading indicator that can provide you with lots information about trend, buy/seller balances and about potential trend shifts. Together with the moving average and the RSI, Bollinger Bands make for a great foundation for a trading strategy.

This is where we stop for this post. I hope it was useful to you! Looking forward to hear your thoughts/comments idea and suggestions. How do you use it? Don’t forget to like and share on social media.

Bollinger Bands Bounce Trading Strategy

In this article, you will find how to use Bollinger bands in day trading. This strategy uses two of the most popular trading indicators on the market, Bollinger Bands and RSI. They are used to simply find a price “bounce” that occurs during the main trend.

If you have been looking for Bollinger band trading strategies that work, you are going to want to pay special attention.

This special strategy teaches you how to read Bollinger Bands and Bollinger Band signals. You’ll also learn about Bollinger Bands squeeze, double Bollinger bands strategy, Bollinger Bands secrets, and more. We also have training for the ADX Indicator.

Something that will look like this:

How To Use The Bollinger Band Indicator

Bollinger Bands are well known in the trading community. You can get a great Bollinger band formula with a simple trading strategy.

They were created by John Bollinger in the early 1980s. The purpose of these bands is to give you a relative definition of high and low. So in theory, the prices are high at the upper band and then are low at the lower band. Bollinger Bands include three different lines. The upper, middle, and lower band. The middle band basically serves as a base for both the upper and lower.

They are mainly used when determining when there are overbought or oversold levels. Selling when the price touches the upper band and buying when the price touches the lower band.

The spacing between the lower, upper, and middle band is determined by volatility. The middle band consists of a 20 period moving average. The upper and lower are two standard deviations below and above the moving average in the middle. Standard deviation is a statistical measure that offers a great reflection of the price volatility.

When you see the band widen that simply means that there is volatility at that time. When the price moves very little, the band will narrow which means that there is little volatility.

I prefer to use this trading strategy using the 1 hour or 4 hour time chart. You can adjust according to what style of trader you are. But the example I will show you will use the 4 hour and 1 hour time chart.

Before we start looking at the rules of the strategy, let’s take a look at Bollinger bands. Let’s see what they will look like on a chart if you have never used this type of indicator in the past:

After examining the picture, it may seem wise to buy every time the price hits the lower band. Or, on the other hand, sell every time the price hits the upper band. This can technically work but is a risky way of trading using the Bollinger Bands. Sometimes strong trends will ride these bands and end up stopping out many unfortunate traders who used that method. This is why we are using the RSI indicator to help confirm and trade the “bounce” of an upper or a lower band. Also, read about how bankers trade in the forex market.

The RSI indicator is used in this strategy to see how the currency is weakening or strengthening. (Tap here for another RSI trading strategy article).

These indicators should come standard on your trading platform. There is no need to adjust these, as we will use the default settings. Here you can learn on How to fade the momentum in Forex Trading.

I would suggest drawing a horizontal line on the 50.00 level in the RSI indicator before starting. You will find out exactly why soon.

Trading Indicators Used with the Bollinger Bands Bounce Trading Strategy:

  • Bollinger Bands (20, 2)
  • RSI (Relative Strength Index) Indicator (14)

How to Buy Low and Sell High

In theory, Bollinger Bands will contain all trading activity that occurs within 2 standard deviations of the expected norm (the trend line).

This means that about 90-95% of price movements will occur within this range.

Bollinger Band traders are looking for instances of resistance and support . Instances of support occur when the demand has become “concentrated” and a downward trend is likely to lose momentum. On the other hand, instances of resistance occur when an upward trend is “condensed” and will likely reverse downward in the near future.

Bollinger Bands make it easy to buy low and sell high. Traders will open a position when the trend line is nearing the bottom of the Bollinger Band range. Traders will need to close a position when the trend line reaches the top of the range.

Rules for Bollinger Band Bounce Trading Strategy

*To make it simple, I am going to use the same (GBPUSD 4-hour chart) example for each of these rules. This trade would have been a “BUY” trade. The rules are the same concept only the exact opposite for a SELL trade. The currency is in an uptrend and then it will pull back to the lower Bollinger Band. From there, if it follows the rules, we will execute a trade.

Rule #1: Find a currency that is in an Uptrend/Downtrend.

Finding a trending market is very simple. You can use price channels, trend lines, Fibonacci lines, to determine a trend. Find higher highs or lower lows and place a trend line on them. If the line is going up, it is an uptrend, if it’s going down, it is a downtrend. It needs to be trending up or down, not a sideways trend.

Rule #2: The currency must fall back (from the uptrend) and touch, or almost touches, the bottom band.

When I say “Almost touches” an example would be something like this

**Bollinger Band trading tips: If it is any more than 5 pips away then I would not consider this validated, and I would wait for it to come closer to the bottom/top band.
As you can see in the example that price came all the way back down, from the uptrend, and touched the bottom band.

Once the price touches the bottom or top band, look a the RSI indicator for confirmation.

Rule #3: Once the Price hits the lower Bollinger Band, look at the RSI indicator and it should be between 30-50 and be rising.

The price hit the Bollinger Band, the RSI (when the price touches the bottom band) needs to be in 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.

You want to see the RSI go up, in this case, in the direction of the trade. Remember that it should be in between the 30-50 mark. (In a sell trade the RSI would need to be in between the 50-70 mark and going downward.)

Once you see this movement you go ahead and look for an entry.

Rule #4: After price hits the lower Bollinger Band, and RSI is going upwards, make an entry when…

You can make an entry when you see a STRONG BULLISH candle to the upside, consecutive reversal candles to the upside, or you find a bullish pattern forming. You need to see that the trend is moving upwards, in this case, before you enter a trade.

If the candlesticks are moving to a point where it is making a new low, this would not be a good time to enter a trade. However, once the candles fail to make a new a low watch to see if it forms a bullish formation. Here is an example of a master candle setup.

In this example, I bumped down to a one hour chart to make an entry. This is perfectly fine to do. This could give you a more accurate place to make an entry point. As I said, the 4 hour and 1-minute time frames are the preferred time frames for this strategy. Yes, there is less of an opportunity for a trade, but the signals are very strong when you are in a higher time frame.

Rule #5: Stop Loss / Take Profit Target

Always remember to be placing a stop loss, and having a good target area. With this strategy, we recommend using a 30-50 pip stop.

Your take profit can be when the price touches the other Bollinger Bands.

Conclusion

The Bollinger Bands are a great indicator to use in any market. When you combine these with the RSI indicator, it should give you great entry points. Here is another strategy called trading volume in Forex.

Something else you can consider is when the price touches the middle band. You can make a second entry to press your winners. This can potentially give you double the profit. With this strategy, we only use the one trade that we initially make. But if your rules allow you to make multiple trades at a time with the same currency pair, then you may consider adding a second position at the middle line.

Tap here to read another great trading strategy! This one requires no indicators, just pure price action!

Thanks for reading,

Please leave a comment below if you have any questions about Bollinger Bands Bounce Strategy!

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The Bollinger Bands Trading Strategy Guide

Last Updated on March 30, 2020

Here’s the thing:

Many new traders think they need more indicators to be a consistently profitable trader.

But the truth is…

It doesn’t work that way.

The price is above the 20 period MA but RSI is showing the market is overbought.

At the same time, the ADX indicator is at 25 which shows a non-trending market.

So, which do you follow?

Now you’re stuck, right?

Well, the good news is…

Bollinger Bands can help you overcome this issue — and much more.

That’s why I’ve created this Bollinger Bands trading strategy guide to show you how useful this indicator is and what it can do for your trading.

Or if you prefer, you can watch this training video below…

Bollinger Bands explained: What is it and how does it work?

Bollinger Bands is a trading indicator (which consist of 3 lines) created by John Bollinger.

It can help you:

  1. Identify potential overbought/oversold areas
  2. Identify the volatility of the markets

Now you’re probably wondering:

“What do the 3 lines mean?”

Upper band – Middle band plus 2 standard deviation

Lower band – Middle band minus 2 standard deviation

Middle band – 20-period Moving Average

Note: I’ve used the default settings for Bollinger Bands which is 20-period moving average and 2 standard deviations for the upper and lower bands.

So, what is standard deviation?

Well, it basically measures how far you’re away from the average.

If you want to learn more, go study this lesson on standard deviation.

So in other words…

If the price is near the upper Bollinger Band, it’s considered “expensive” because it is 2 standard deviation above the average (the 20-period moving average).

And if the is price near the lower Bollinger Band, it’s considered “cheap” because it’s 2 standard deviation below the average.

Here’s an example:

Do not make this MISTAKE when trading Bollinger Bands

Just because the price seems “cheap” or “expensive” doesn’t mean you enter a trade immediately.

Because in trending markets, the market can remain “cheap” or “expensive” for a long period of time.

Here’s an example: EUR/USD remained “expensive” for many months…

As you can see, it’s a painful thing to do if you blindly shorted when the price is at the upper bands.

So what should you do?

Bollinger Bands trading strategy: How to buy low and sell high

You’ve probably heard this a gazillion times.

If you want to make money in the markets, just buy low and sell high.

But the question is… HOW?

Well, you can do so with Bollinger Bands (duh).

The outer Bollinger Bands are 2 standard deviations away from the mean.

This means if the price is in the lower band, it’s considered “cheap”. And if it’s in the upper band, it’s considered “expensive”.

But before you think…

“Great! I’ll just go long when the price reaches the lower band.”

Not so fast my young Padawan.

If you want to have a higher probability of success, then you’ll need a few confluence factors coming together before you trade the bands.

  • Look to long the lower band in an uptrend (and vice versa)
  • Reversal candlestick patterns that show signs of reversal
  • The outer bands coincide with Support and Resistance

Here’s an example:

The price on EUR/USD is at the lower Bollinger Band that coincides with Support, and it formed Bullish Engulfing pattern.

Pro Tip: You can adjust your Bollinger Bands settings to 3 standard deviation (or higher) to identify even more overbought/oversold levels to trade off.

Moving on…

Bollinger Bands Squeeze: How to identify explosive breakout trades about to occur

Volatility is always changing.

The markets move from a period of high volatility to low volatility (and vice versa).

If you’re a new trader, it can be difficult to identify the volatility of the markets.

So, this is where Bollinger Bands can help because it contracts when volatility is low and expands when volatility is high.

Here’s an example:

So, the question is…

How do you use Bollinger Bands to anticipate a possible breakout?

You look for the Bollinger Bands to contract (or squeeze) because it tells you the market is in a low volatility environment.

Because volatility tends to expand after contraction!

An example: Before the breakdown, Crude Oil is in a low volatility environment (as shown by the contraction of the bands).

Pro Tip: The longer the volatility contraction, the stronger the subsequent breakout will be.

How to identify the direction of the breakout

Although Bollinger Bands can alert you to potential breakout trades, it doesn’t tell you the direction of the breakout.

However, you don’t need to be Einstein to figure out where the market is likely to go.

Because all you need to do is look at the trend.

Look at the chart below:

Where do you think the market is likely to breakout, higher or lower?

Probably lower because the trend is down.

And you’re right because the market broke down lower (yes I cherry-picked this chart)…

Simple yet powerful, right?

How to trade with the trend using Bollinger bands

You know the middle line of the Bollinger Bands is simply a 20-period moving average (otherwise known as the mean of the Bollinger Bands).

And in strong trending markets, the 20-period moving average can act as an “area of value”.

This means when the market pullback towards the 20 MA, it’s an opportunity for you to get long (or short).

An example: The price bouncing off the 20-period moving average and it offers shorting opportunities…

Here’s another example:

Pro Tip: If you want to ride the trend, you can trail your stop-loss using the 20 MA, or the outer Bollinger Bands.

The Bollinger Bands and RSI Combo (a little-known technique)

Here’s the thing:

The Bollinger Bands indicator is great for identifying areas of value on your chart.

But the problem is… it doesn’t tell you the strength or weakness behind the move.

For example: How do you tell if the market will continue to trade outside of the outer bands or mean revert?

And what you’re looking for is a divergence on the RSI indicator.

You’re probably wondering:

“What is an RSI divergence?”

Well, it can go 2 ways…

  1. A bearish divergence is when the market makes a higher high, but the RSI indicator shows a lower high (a sign of weakness)
  2. A bullish divergence means is when the market makes a lower low, but the RSI indicator shows a higher low (a sign of strength)

So, now the question is…

“How do you combine RSI divergence with Bollinger Bands?”

If the price is at upper Bollinger Bands, then you can look for a bearish RSI divergence to indicate weakness in the underlying move.

If the price is at lower Bollinger Bands, then you can look for bullish RSI divergence to indicate strength in the underlying move.

Here’s an example:

Pro Tip: You can combine this technique with Support and Resistance to find high probability reversal trades.

The Rubber Band effect: How to use Bollinger Bands and “predict” market reversal

You can think of Bollinger Bands like a rubber band.

Whenever the price gets too far away from it, it tends to mean revert back towards the middle band.

You’re probably thinking…

“But how do you know when it’s about to snap back? Because the price can stay overstretched for a long time.”

You’re absolutely right.

That’s why you must also take into consideration Bollinger Bands, Support Resistance, and Candlestick patterns.

Here’s how it works…

(For long setups)

  1. Look for strong momentum into Support
  2. You want to see the candle close outside the lower Bollinger Bands (this tells you the market is overstretched)
  3. If the next candle is a bullish reversal pattern (like Hammer, Bullish Engulfing, etc.), then the market is likely to reverse higher
  4. And vice versa for short setups

Here’s what I mean…

Price bounced from Support at EUR/CHF Daily:

Price bounced from Support at Brent Crude Oil Weekly:

Pro Tip:

By default, the outer bands are 2 standard deviations away from the middle band (20MA).

If you want to identify even more overstretch market conditions, you can increase the standard deviation to 3 or more.

Frequently asked questions

#1: Hey Rayner, what timeframe does the Bollinger Bands work best on?

There’s really no best timeframe out there to use the Bollinger Bands as the concepts I’ve shared can be applied across different timeframes.

So it depends on your trading style and approach:

  • If you’re a day trader, then you’ll use the Bollinger Bands on the lower timeframe like the 15-minutes or 5-minutes timeframe.
  • If you’re a swing or position trader, then you’ll use the Bollinger Bands on the daily or the weekly timeframe.

#2: Is there any difference between the accumulation stage of a market and a Bollinger Bands squeeze?

Yes, there are differences. An accumulation stage is a range market within a downtrend, where you can identify resistance and support as price swings up and down within the accumulation.

Whereas in a Bollinger Bands squeeze, the market doesn’t swing up and down because the price action gets really tight and the candles are overlapping one another. So it’s impossible to identify support and resistance in a Bollinger Bands squeeze.

#3: Is it better to use Bollinger Bands to trade breakout or to trade market reversals?

It can similarly serve for both breakout and reversal trades.

You can look to trade breakouts after a Bollinger Bands squeeze.

Or you can also use it to trade market reversals after the Bollinger Bands expand, which shows the increase in volatility of the market. If the price comes to a key market structure like support resistance and then forms a price rejection, that’s a possible opportunity for you to take a reversal trade.

Conclusion

Here’s what you’ve learned today:

  • The Bollinger Bands indicator can help you identify when the market is “cheap” or “expensive”
  • In an uptrend, you can long near the lower Bollinger Band
  • In a downtrend, you can short near the upper Bollinger Band
  • When the Bollinger Bands is in a squeeze, it signals the market is “ready” to breakout
  • You can use the 20-period moving average to time your entries in trending market
  • You can use Bollinger Bands and RSI divergence to find high probability reversal trades
  • You can use Bollinger Bands and Support and Resistance to “predict” market reversal

Now, here’s what I would like to know…

How do you use the Bollinger Bands trading indicator?

Let me know your thoughts in the comments section below.

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