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Bollinger Bands Strategies THAT ACTUALLY WORK (Trading Systems With BB Indicator) - YouTube
Channel: The Secret Mindset
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Bollinger bands are one of the most popular
technical analysis tools implemented in todayâs
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trading environment.
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As the name implies, Bollinger bands refer
to the bands (or price channels) placed on
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a chart to represent a volatility range.
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Bollinger bands consist of a set of three
bands drawn in relation to price: there is
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the 20-period moving average in the middle,
with an upper and lower band of two standard
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deviations above and below the simple moving
average.
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Bollinger bands use a statistical measure
known as the standard deviation, to establish
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where a band of support or resistance levels
might lie.
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This concept is also known as a volatility
channel.
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A volatility channel plots lines above and
below a central measure of price.
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These lines, also known as envelopes or bands,
widen or contract according to how volatile
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or non-volatile a market is.
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Bollinger bandsÂź measure market volatility
and provide lots of useful information, including:
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Trend continuation or reversal
Periods of market consolidation
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Periods of upcoming large volatility breakouts
Possible market tops or bottoms, and potential
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price targets
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Bollinger bands are a trend indicator that
detects the volatility and dynamics of the
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price on the market.
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The bands contract when the market volatility
is low and expand when volatility increases.
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During periods of low volatility, the bands
are narrow, while during periods of high volatility
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Bollinger bands expand drastically.
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The upper band shows a level that is statistically
high or expensive
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The lower band shows a level that is statistically
low or cheap
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The Bollinger bandwidth correlates to the
volatility of the market
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For a technical point of view, trading near
the outer bands provides an element of confidence
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that there is resistance (at upper boundary)
or support (at bottom boundary), however,
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this concept alone does not provide relevant
buy or sell signals; all that it determines
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is whether the prices are high or low, on
a relative basis.
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So, the general consensus is that when the
price reaches the upper band it is considered
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as overbought and when price approaches lower
band it is considered oversold.
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The Bollinger bands have a default setting
of (20,2) . When using trading bands, it is
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the price action as it nears the edges of
the band that should be of particular interest
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to us.
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Now, regarding standard deviation of the Bollinger
bands.
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What is it?
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The standard deviation is basically a number
expressing how much the values of the price
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differ from the mean value.
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Prices will distribute around the simple moving
average:
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Around 65% of price action is contained within
a standard deviation of 1 of the Bollinger
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bands
Around 95% of price action is contained within
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standard deviation of 2 of the Bollinger bands;
Almost 99% of the price action is contained
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within standard deviation of 3 of the Bollinger
bands.
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Ok, how to use this information?
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If you decide to back test Bollinger bands
and play with its inputs, you can adjust the
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value of the standard deviation.
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If you lower it, you will see the price leaving
the bands often, probably offering a lot of
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noise.
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However, if you increase it to 3, you will
realize that the price will leave the band
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rarely, and might be better to find dynamic
zones of support and resistance.
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So, lower settings on the Bollinger bands
will generate more trading signals, but will
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also increase the number of false signals,
as the price movement will exit more often
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from the bands.
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On the other hand, a 2.5 standard deviation
Bollinger bands or even a 3 standard deviation
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will generate fewer, but high-probability
signals.
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Now, I prefer to trade with the odds in my
favor.
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So, if a standard deviation of 3.0 will offer
me around 99% certainty that the price wonât
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exit the Bollinger bands, then I will be interested
to trade only with these settings.
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How to trade Bollinger bands?
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The use of Bollinger bands varies among traders
depending on their overall trading strategies,
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styles and goals.
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When using Bollinger bands, many define the
lower and upper bands as price targets.
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Some buy when the price touches the lower
band and exit when the price touches the moving
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average in the center of the bands.
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Others prefer to sell when the price falls
below the lower band or buy when price breaks
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above the upper band.
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The upper and lower bands can act as dynamic
resistance and support levels, as traders
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generally avoid buying when the asset price
hits the upper Bollinger band, respectively
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avoid selling whenever the price reaches the
lower Bollinger band.
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In a sideways market, when there isnât a
clear trend on the chart, Bollinger bands
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provide very good support and resistance,
as most traders believe that thereâs high
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chance of prices staying within Bollinger
bands.
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Studies have shown that the penetration of
Bollinger bands with a standard deviation
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of 3 occurs rarely.
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The rest of the time prices fluctuate within
the Bollinger bands, and often price returns
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to the middle of the bands.
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In this way Bollinger bands seem to act like
rubber bands that can only stretch so far
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before snapping back to the middle.
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The upper and lower ranges of the Bollinger
bands, which are created by the 2 or 3 standard
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deviation lines, create the boundaries of
price.
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Since there are greater odds that price will
be contained within the bands instead of penetrating
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them, one of the surest and most common ways
of trading the bands is to buy when prices
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near the lower band and sell when prices near
the upper range band.
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But not blindly.
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We talked before about price action.
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This strategy is suited in non-trending markets,
when there isnât a clear direction.
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Even more, when the bands are parallel, the
signal is even more powerful.
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So we want to sell at the upper bb and buy
at the lower bb, when the bands are parallel,
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and preferably, if we see addition confirmation
of a support or resistance.
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Here are a few examples of Bollinger bands
signals during rangesâŠâŠ
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Also, you could take signals during trends,
but only in the direction of the main trend.
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Why is that?
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Just because prices hit the upper or lower
Bollinger does not necessarily mean that it
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is a good time to sell or buy.
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Strong trends will ârideâ these bands
and wipe out any trader attempting to buy
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on the âlowâ prices in a downtrend or
sell on the âhighâ prices of an uptrend.
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In fact, price will be making new highs in
an uptrend and new lows in a downtrend, hitting
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and exceeding the bands, quickly taking out
the stops on trades taken directly on the
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bands.
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So, instead, we look to sell the upper bb
during downtrends, meaning when the price
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is making lower lows and lower highs, and
buy the lower bb in uptrends, when the price
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is making higher highs and higher lows.
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Practically we look for pullbacks or corrections,
but in the direction of the trend, we donât
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chase reversals.
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Here are a few examples of Bollinger bands
signals during trendsâŠ..
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As we previously mentioned, Bollinger bands
indicator measures the volatility on the market.
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The wider the band, the more volatility it
has.
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A narrow band means indecision on price movement
and when this happens, it is almost always
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guaranteed that markets are about to move
either up or down.
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Also, if the market has recently experienced
a lot of volatility and the bands are far
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apart, this is a sign that the market will
settle down and trade into a range in the
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near future.
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Another Bollinger bands strategy that is relatively
simple to implement is known as a squeeze
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strategy.
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Squeeze refers to the narrowing of the trading
range and implies a potential breakout.
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It happens when the price starts shifting
sideways in a tight consolidation.
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You can visually identify when the price is
consolidating as the lower and upper bands
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get closer together on the chart.
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It means the volatility of the particular
asset has decreased.
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After a period of consolidation, the price
usually tends to make a larger move in either
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direction, ideally on higher volume.
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Expanding volume on a breakout is a sign that
traders are expecting that the price will
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continue to move in the breakout direction.
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The longer it moves within this narrow band,
the more likely the market is eventually going
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to penetrate these bands and continue on in
the direction of the breakout, especially
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if this event occurs in the direction of the
previously established longer-term trend.
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Timing is everything, however, and just we
donât know how long the squeeze will last.
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How to identify the breakout?
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Look at the hooks of Bollinger bands.
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We want to see the upper band pointing up
and lower band pointing down.
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If the bands remain flat or just one band
hooks while the other does not, the breakout
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isnât there yet.
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However, if upper band is rising while the
lower band is falling, after a period of consolidation
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and tight range, this signifies that a potential
explosion in price action is about to occur,
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in the direction of the candlestick pushing
against the band.
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The more vertical, the stronger the potential
move.
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Here are other examples of valid Bollinger
bands breakouts.
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Until next time.
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