How To Trade Bollinger Bands

Love Trading Buy/Sell Arrow Signals? Try This!

 What are Bollinger bands? How do you trade Bollinger bands?

“Bollinger Bands consist of:  a middle band being an N-period simple moving average, an upper band at K times an N-period standard deviation above the middle band, a lower band at K times an N-period standard deviation below the middle band. Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice. Usually the same period is used for both the middle band and the calculation of standard deviation.” Bands can be used to measure the highness or lowness of the price relative to previous trades.Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands are a technical analysis tool invented by John Bollinger”

There are many different ways to trade Bollinger Bands.

One of the most basic way is to treat it as an overbought/sold indicator. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. Obviously there are some inherent problems with this method (as with any OB/OS method).

The real issue comes in knowing when is a price going to bounce off a BB or when is it going to break through. Obviously a chart will have many examples of price bouncing off a BB and thus to the eye it looks like a sound strategy but the time when the price break through a BB it can move fast and unless you use sensible stops you can find yourself a decent number of points in the red. Naturally you could use a stochastic to help identify when to go with a bounce or not. However, personally think you will have the same issue with that indicator. Furthermore, it will often mean you are trying to trade counter trend. So maybe this method should be left for closing positions rather than opening one.

Another common method is to trade a break of the middle line after a double bottom or double top. This will at least mean that there has been some support/resistance formed before you are triggered into a trade. The problem with this method I guess is false triggers. Double bottoms and tops often appear in tight ranges of low volatility. You can often be triggered long after a double bottom only for it to retest the previous two lows. If you are using sensible stops would most likely be stopped out of the trade. This method does however link to another method of trading the BBands.

During times or low volatility the bands will contract. Thus when the price does break one of the bands you can be pretty sure it’s going to be a decent move. But bollinger bands can stay contracted for some period. Furthermore you have to decide which direction is it going to break or are you going to let the market decide for you?

Personally I think if you are going to use bollinger bands you are best using a combination of all ideas to create a trading picture which develops pointing in one direction over the other.

So, for example, you could wait for a break and bounce of a bollinger band, wait for a restest of that break (maybe a double bottom/top forms), wait for it to cross the middle line and enter at the break of the high/low of the bollinger band contraction in that direction.

Naturally I would suggest maybe using other indicators to confirm such trades. You don’t need to clutter up your chart with loads of indicators. Maybe just try a convergence/divergence indicator such as macd or a basic relative strength indicator and look for divergences to compliment the double bottom/tops on the bollinger bands.

As with all things in trading, you will just have to give it a try and see what you see. If it looks good to you, maybe demo it for a while and see how you go. If it looks like a lot of squiggly lines, ignore it and move on. Life and ‘trading’ moves way to quick to waste time trying to get some indicator to work perfectly for you. You’ll either have a feeling that it is for you or you won’t.

There are plenty of different ways to trade, so don’t worry if Bollinger Bands are not for you. Remember the only right way to trade is the way that makes you money consistently!!

Download a host of Bollinger Band Metatrader Indicators

Updated 2/7/09

Below is a chart of a trade I took today on the FTSE 100 futures today. I thought I would add it to the topic as it shows quite clearly the various trading methods at work in one go.

You can see the initial touch of the bottom bollinger band. The firist thing to note is that it was at a higher low to yesterdays low of day. Then we chopped about in the band and broke the bottom band again but rebounded. This, obviously, highlights the “double bottom”(top) trading method. Thirdly, you can see that compared to the earlier price action the bollinger band had narrowed somewhat which indicates a new impulse could happen on a break of the bollinger band.

So which direction would/should it break in? Given the double bottom which were higher than yesterday’s low a long breakout would be the most likely. Although not on the chart I am sure if you added a stochastic to the chart it would show that the FTSE in this 5 minute chart was also quite oversold.

The next thing was to wait for a cross above the middle line which is shown by the yellow arrow, although the actual line is not on the chart as it often clutters it up with my other ma’s on there. This also coincided with a confirmation arrow, which is nothing more than a moving average crossover signal, which I use to prevent me getting in to a trade too early.

The move was further compunded by the final bollinger band trading method which is to wait for a break of the brevious high/low. This is marked by the line at the high inbetween the two lows in the double bottom.

The resulting move (at time of press) was worth 36pts from the mid line and 25 pts from the break of the high. So a pretty good set up all in all. The trading picture built up during the session which gives you more confidence in the trade rather than just taking the first signal that comes your way. I think you will find it a useful trading system, especially those who like to trade indicators and obviously those who like to trade using Bollinger bands.

Click image to view full size chart in a new window

3 Responses

  1. Jean Cuzco says:

    Many folks just blow this stuff off, and I guess that their money making ability takes a hit as a result. There is a major tendency to wait for quick solutions that the majority of folds end up destroying their own chances at success. A nice reality check helps all traders to maintain our bearing in a treacherous market.

  2. Er.SS Hari says:

    When trend reverses to upside lower band shows rigidity and vice versa.Rigid side is showing there is further dead end street go back.bollinger bands do not do cat copy of middle line but do adjustment with volatiles so a great plus point.Most useful to know the trend its strength and continuation pattern plus reversals.But best suited for trading range market.

  3. bb says:

    oversold and overbought trading strategies are mainly when there is no trand and the market is running in range. A nicely written article. Appreciate it

Free Trading Systems. Metatrader Indicators.Expert Advisors.Forex Forum. Privacy Policy    
© 2009-2010 Great Trading Systems. All rights reserved.