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How To Combine Bollinger Bands & Volume (Forex & CFD Stock BB Squeeze Trading Strategy) - YouTube
Channel: The Secret Mindset
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Bollinger bands squeeze is a great chart pattern
that enables you to locate strong and profitable
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trade setups.
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When the market becomes too slow and there
is a low volatility, the price moves sideways
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and the Bollinger upper and lower bands become
very close to each other.
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This is called “Bollinger bands squeeze”.
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You can see it on all time frames very frequently,
especially the shorter ones.
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Sometimes Bollinger bands squeeze is continued
for many candlesticks, and sometimes it is
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only for a few candles.
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It really doesn’t matter how many candlesticks
are inside the squeezed Bollinger bands.
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Something that matters is that such a market
is not going to remain calm and quiet forever,
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and this low volatility will be followed by
a strong movement.
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This strong movement can be so profitable
for the traders if they enter on time.
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Bollinger band squeeze trade setups are really
great, because the movement that happens after
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the squeeze is usually too strong, and above
all, we can enter with a very tight stop loss
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and a wide target.
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Bollinger bands squeeze trade setups are really
profitable and have a great risk to reward
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(r/r) ratio because they show us the beginning
of the strong movements and hopefully strong
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and continued trends.
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So Bollinger band squeeze occurs when volatility
falls to low levels and the Bollinger bands
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narrow.
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According to john Bollinger, periods of low
volatility are often followed by periods of
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high volatility.
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Therefore, a volatility contraction or narrowing
of the bands can foreshadow a significant
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advance or decline.
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Once the squeeze play is on, a subsequent
band break signals the start of a new move.
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A new advance starts with a squeeze and break
above the upper band.
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A new decline starts with a squeeze and break
below the lower band.
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Before diving into the details of this strategy,
let's briefly review some of the key indicators.
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In this example we are using daily prices
and setting the Bollinger bands at 20 periods
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with two standard deviations, which are the
default settings.
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These of course can be changed to suit you
trading preferences or the characteristics
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of the underlying stock or currency you are
trading.
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So Bollinger bands start with the 20-day SMA
of closing prices.
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The upper and lower bands are then set two
standard deviations above and below this moving
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average.
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The bands move away from the moving average
when volatility expands and move towards the
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moving average when volatility contracts.
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There is also an indicator for measuring the
distance between the Bollinger bands and this
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indicator is called Bollinger bandwidth, or
just the bandwidth indicator.
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It is simply the value of the upper band minus
the value of the lower band.
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Understandably, stocks with higher prices
tend to have higher bandwidth readings than
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stocks with lower prices.
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Keep this in mind this detail when using the
indicator.
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The Bollinger band squeeze is a straightforward
strategy that is relatively simple to implement.
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First, look for stocks or currency pairs with
narrowing Bollinger bands and low bandwidth
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levels.
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Ideally, bandwidth should be near the low
end of its range.
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Second, wait for a band break to signal the
start of a new move.
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An upside bank break is considered bullish,
while a downside band break is bearish.
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Note that narrowing bands don’t provide
any directional clues.
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They simply show that volatility is contracting
and that you should be prepared for a volatility
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expansion, which means a directional move.
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So you need:
Bollinger bands narrow on the price chart.
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The bandwidth must be near the low end of
range.
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Price breaks above the upper band or below
the lower band
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Even though the Bollinger band squeeze is
straightforward, this method used by itself,
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without context will not bring consistent
gains.
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That why you should combine this strategy
with basic chart analysis to confirm signals.
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For example, a break above resistance can
be used to confirm a break above the upper
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band.
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Similarly, a break below support can be used
to confirm a break below the lower band.
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Unconfirmed band breaks are subject to failure.
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So let’s take an example to make it very
clear.
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The chart shows AMD on the daily timeframe
with several signals within a week period.
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After a surge in price, the stock consolidated
with an extended trading range.
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AMD broke the lower band several times, but
did not break the key support level.
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Basic chart analysis reveals a possible flag-type
pattern, and although this might look at first
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glance as a bb squeeze, the support right
below the breakout invalidated the setup.
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At the same time, the market was making higher
highs and higher lows, so why would you take
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a bb squeeze trade against the trend?
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Notice that this bb squeeze pattern formed
a few days later, which makes it a bullish
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continuation pattern.
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AMD price broke above the upper band, then
broke resistance for confirmation.
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Here are other examples of valid bb squeeze
trades, taking into account support and resistance
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levels.
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Because the Bollinger band squeeze does not
provide any directional clues, you must use
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other aspects of technical analysis to anticipate
or confirm a directional break.
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In addition to basic chart analysis, you can
also apply complimentary tools to look for
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signs of buying or selling pressure within
the consolidation.
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Momentum oscillators and moving averages will
have no use during a consolidation because
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these indicators simply flatten along with
price action.
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Instead, you should consider using volume-based
indicators, such as the money flow index (MFI)
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or on balance volume (OBV).
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Signs of accumulation increase the chances
of an upside breakout, while signs of distribution
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increase the chances of a downside break.
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The chart shows micron technology with the
Bollinger band squeeze occurring here.
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The bands moved to their narrowest range in
months as volatility contracted.
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The indicator window shows money flow weakening
and below 50 level.
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Notice that mf stayed below its 50 centerline
and continued lower as we had the bb breakout.
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Money flow readings below 50 reflect distribution
or selling pressure that can be used to anticipate
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or confirm a support break in the stock.
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Also, notice the second Bollinger band squeeze
here and the imminent breakout.
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During the squeeze, notice how money flow
stayed above 50 level, which showed accumulation
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during the trading range.
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Signs of buying pressure or accumulation increased
the chances of an upside breakout.
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As the price closed outside the upped Bollinger
band, we also had the money flow increasing
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even higher, confirming the move.
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This is how you increase your chances of finding
valid BB squeeze breakouts.
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Pay attention to the volume.
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Here are other examples of bb squeeze trades,
confirmed by the volume.
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In his book, john Bollinger advises traders
to beware of the “head fake.”
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This occurs when prices break a band, then
suddenly reverse and move the other way, similar
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to a bull or bear trap.
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A bullish head fake starts when Bollinger
bands contract and prices break above the
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upper band.
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This bullish signal does not last long because
prices quickly move back below the upper band
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and proceed to break the lower band.
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A bearish head fake starts when Bollinger
bands contract and prices break below the
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lower band.
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This bearish signal does not last long because
prices quickly move back above the lower band
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and proceed to break the upper band.
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The key here is simple price action and paying
attention to swing highs and lows.
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An uptrend can simply be defined as a series
of higher-highs in price, coupled with higher-lows.
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In other words, the overall price direction
is higher, even though the price will experience
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corrections along the way.
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A downtrend is a series of lower-high and
lower-low price swings.
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These may seem like elementary principles,
but in their simplicity is their elegance
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and usefulness.
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By understanding these simple concept of trends,
it is possible to determine when a trend is
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healthy and when it is about to reverse.
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Exploit a higher-low in an uptrend, and a
lower-high in a downtrend to capitalize on
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a changing market direction.
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That’s why when I see a breakout after a
bb squeeze pattern, I’m always aware of
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the recent swings.
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If the market makes higher-highs in price,
i search for bullish breakouts.
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If the price makes lower-highs, I search for
bearish breakouts.
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This way i avoid the “head fake” pattern.
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Use this simple filter, and you won’t be
trapped in the “head fake” pattern.
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Now, Bollinger band squeeze is a trading strategy
designed to find consolidations with decreasing
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volatility.
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In its purest form, this strategy is neutral
and the breakout can be up or down.
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That’s why, you must employ other aspects
of technical analysis to formulate a trading
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bias to act before the break or confirm the
break.
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And remember that trading with the last established
trend also increases your winning odds.
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Until next time.
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