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TOP 10 BEST Bollinger Bands Trading Strategies In 2022 (For Forex & Stock Market) - YouTube
Channel: The Secret Mindset
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Bollinger Bands is one of the most versatile
indicators.
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In markets that tend to be rather volatile,
the Bollinger Bands can be very useful in
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determining price patterns, reading the trend
strength, timing entries during range markets
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and finding potential market tops in a dynamic,
adaptive manner.
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In today’s videos, we’ll discuss about
the most important 10 trading rules and strategies
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you need to know about the Bollinger Bands.
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1.
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Buy at the lower Bollinger Band in uptrends
and sell and the upper BB in downtrends
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A common approach when using Bollinger Bands
is to identify overbought or oversold market
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conditions during trends.
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Meaning you can look at the overall direction
of price and then only take trade signals
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that align with the trend.
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When the price of the asset is in an uptrend,
making higher highs and higher lows, and breaks
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below the lower Bollinger Band, prices have
perhaps corrected too much and are due to
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bounce.
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When the price reaches the lower Bollinger
Band in an uptrend, you have a potential buy
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trade.
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On the other hand, when price is in a downtrend,
making lower lows and lower highs, and breaks
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above the upper band or touches the band,
the market is perhaps overbought and due for
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a pullback.
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2.
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Use Bollinger Bands for finding dynamic support
& resistance areas
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Bollinger Bands are comprised of three lines.
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The middle band is a moving average and the
upper and lower bands are positioned on either
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side of the moving average.
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As the Bollinger Bands are based on the standard
deviation, and because the market is evolving,
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sometimes buying/selling interest changes
in a way that isn’t at pre-designed horizontal
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levels.
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The Bollinger bands move as the price moves,
offering dynamic support and resistance.
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And in combination with classic support and
resistance areas, the Bollinger bands signals
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are even more reliable.
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3.
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When Bollinger Band are parallel, price is
unlikely to stay outside the bands
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After the price experiences a large up or
down movement, it will often consolidate or
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trading in a channel.
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These periods of price consolidation present
opportunities for taking shorter term positions
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using Bollinger bands.
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From my experience, after a steep upward or
downward movement in price, the Bollinger
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Bands will flatten, and then there is a high
probability that at least several back and
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forth movements between the upper and lower
bands will occur.
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When bands are parallel, there is a higher
chance that price will stay within the bands
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instead of breaking and staying outside of
them.
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So, one of the most common ways of trading
the bands is to buy when prices are near the
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lower band and sell when prices are near the
upper range band during non-trending periods,
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when there isn’t a clear direction
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4.
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Add Bollinger Bandwidth indicator to confirm
volatility
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The Bollinger Bandwidth indicator illustrates
periods of varying volatility relative to
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the market price movement.
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Basically, the indicator measures the percentage
difference between the upper and lower Bollinger
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Bands.
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When the distance between the two outer Bollinger
bands contract, the Bandwidth indicator falls
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and when the upper and the lower Bollinger
Bands expand, the Bandwidth indicator rises.
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The Bollinger bandwidth provides a better
visual of price consolidation (low bandwidth
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values) and periods of volatility (high bandwidth
values).
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During a period of rising price volatility,
the distance between the two bands will widen
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and Bollinger Band Width will increase.
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Conversely, during a period of low market
volatility, the distance between the two bands
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will contract and Bollinger Band Width will
decrease.
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When the distance between the two bands is
relatively narrow that is often a sign that
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a market may be about to initiate a pronounced
move in either direction.
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5.
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Search the Bollinger bands squeeze pattern
and wait for the imminent breakout
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The distance between the outer Bollinger bands
is dependent upon the standard deviation.
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When markets become too slow and there is
a low volatility, the price moves sideways
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and Bollinger upper and lower bands become
close to each other.
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This is called a squeeze.
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An extreme contraction of the bands or a sharp
narrowing of the bands implies that volatility
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is simply too low, at least from a historical
perspective, and we could expect a significant
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advance or decline in the immediate future.
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So when the bands squeeze together, it usually
means that a breakout is getting ready to
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happen.
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If the candles start to break out above the
TOP band, then the move will usually continue
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to go UP.
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If the candles start to break out below the
BOTTOM band, then price will usually continue
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to go DOWN.
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Of course, you need to pay attention to other
aspects, because false breakouts will occur.
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So keep in mind that the contraction of the
bands does not necessarily signal the specific
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direction of the next move.
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Rather, it only alerts traders to prepare
for an increase in volatility, and hence to
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expect an impulsive move in the near horizon.
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6.
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Apply Bollinger Bands on other indicators
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Bollinger Bands can be applied on various
tools, mainly to determine entry and exit
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signals.
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This helps in catching price swings where
corrections or pullbacks may start.
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Traders often apply the Bands on the Relative
Strength Index and take crossover signals.
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The trend is considered bullish when the RSI
moves above the middle Bollinger Band.
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If the RSI line is below the middle Band,
the market is considered bearish.
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You can also apply it on the MACD.
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A common strategy is to find double tops on
the MACD during downtrends at the upper Bollinger
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Band or double bottoms during uptrends at
the lower Bollinger Bands.
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This is a great way to find price swings on
a chart.
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Or you could apply it to Stochastic indicator
and pay attention to overbought and oversold
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levels on the oscillator, outside the Bollinger
Band.
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Of course, taking into account support and
resistance levels.
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Here, we have an oversold Stochastic, outside
the lower Bollinger Band, occurring at support.
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After the Stochastic crossover, inside the
bands, the prices changed direction.
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7.
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Use Bollinger Bands in combination with leading
indicators
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Bollinger Bands indicator is lagging, meaning
it provides insights about the historical
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data of a particular market.
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It moves after the price has moved, hence
the “lag” aspect.
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For more reliable signals, you can add a leading
indicator on your chart.
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In this way, both classes of indicators will
help you get a better read on the market.
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Leading indicators anticipate price movements
ahead of time.
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They attempt to predict where the price is
heading.
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Such indicators include pivot points, volume
or Fibonacci retracements.
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For example, we have a Bollinger band squeeze
pattern occurring here.
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The bands became narrow range as volatility
contracted.
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The On Balance Volume showed accumulation
during the trading range.
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And these signs of buying pressure increase
the chances of an upside breakout.
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As the price closed outside the upper Bollinger
band, we also had the OBV increasing even
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higher, confirming the move.
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You could also use the bands in combination
with pivot points, and search for confluence
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areas, with a pivot point and a Bollinger
band.
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Here we have an uptrend.
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A valid signal occurred when the price retraced
to the lower Bollinger band.
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This area coincided with S1 pivot level.
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Another valid signal occurred when the price
retraced to the middle Bollinger Band, area
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which coincided with the central pivot point.
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8.
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Pay attention to candlestick patterns that
touch the upper and lower bands
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To enhance the accuracy of your trades when
candles are touching the upper or lower bands,
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observing the candlestick patterns may be
helpful, especially when you spot reversal
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patterns.
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Here we have an “engulfing setup”, meaning
a two-candle pattern that can signal a potential
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reversal at market extreme, in this case at
the lower Bollinger Band.
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A “hammer” occurring at the lower Bollinger
Band represents another important pattern.
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The hammer is made up of one candlestick with
a small body, long lower shadow and small
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or nonexistent upper shadow.
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Morning Star pattern at the lower Bollinger
band could be another signal.
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Here, the red candlestick confirms that the
decline remains in force and selling dominates.
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However, the decline slows significantly after
this small candlestick forms.
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The small candlestick indicates indecision
and a possible reversal of trend.
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The third long candlestick provides bullish
confirmation of the reversal, at the lower
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Bollinger Band.
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9.
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Search for divergences at the upper and lower
bands
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Divergence analysis is a very useful support
in predicting future price behavior based
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on current values.
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A divergence is an event that is associated
with increased levels of volatility.
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A bearish divergence is when the market makes
a higher high, but the oscillator you’re
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using, RSI or Stochastic for example, prints
a lower high (which is a sign of weakness)
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A bullish divergence is when the market makes
a lower low, but the oscillator shows a higher
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low (and this is a sign of strength).
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So how do you combine this signal with Bollinger
Bands.
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Simple.
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If the price is at upper Bollinger Bands,
then you can look for a bearish divergence
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to indicate weakness in the underlying move
and a potential reversal to at least the middle
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Bollinger Band
If the price is at lower Bollinger Bands,
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then you can look for a bullish divergence
to indicate strength in the underlying move.
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10.
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Adjust the middle Bollinger Band and its standard
deviation for more price containment
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Bollinger bands are using the standard configuration
of a 20-period simple moving average and bands
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of two standard deviations from the mean.
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But the top and bottom lines can be set to
a different settings based on your strategy.
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For consistent price containment within the
bands, if the average period is increased,
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the number of standard deviations also needs
to be increased.
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Likewise, if the average is decreased, the
number of standard deviations should be reduced.
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As a general rule of thumb, the shorter the
period and the higher the standard deviation
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setting, the more likely the current price
will be within the bands.
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Until next time.
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