Top 3 Bollinger Bands Trading Strategies

Top 3 Bollinger Bands Trading Strategies

As previously discussed, low periods of volatility precede high periods of volatility. To use the Squeeze indicator in Thinkorswim, right click on a chart and select ‘Insert Analysis Technique’. Every trader at Simpler Trading uses the Squeeze, and for good reason. There is no better indicator to show these times of opportunity right before a directional move.

This comes with the catch that it is likely to generate more false signals compared with a longer time-frame. You would then seek to confirm the signal via the momentum indicator, by looking for whether the price/momentum divergence is either bullish or bearish.

There’ll be a lot of noise and the dots will flip from side-to-side giving you no clear signal. Momentum indicators tell you how strong the trend is and can also tell you if a reversal is going to occur. Momentum indicators include Relative Strength Index (RSI), Stochastic, Average Directional Index (ADX), and Ichimoku Kinko Hyo. Chart 2 shows Alaska Airlines (ALK) with a squeeze in mid-June.

It's a free plugin for MT4, with a selection of extra tools and indicators that have been chosen and developed by trading experts. This is a rudimentary approach however, and should be considered with great caution. The timing of such signals can be difficult, meaning that you miss most of the move by the time the signal arrives. The timing can, however, be improved with the use of amoving average in conjunction with the momentum indicator.

Why MACD Divergence Can Be an Unreliable Signal

They are used in pairs, both upper and lower bands and in conjunction with a moving average. Further, the pair of bands is not intended to be used on its own. ABollinger Band®technical indicator has bands generally placed two standard deviations away from a simple moving average. In general, a move toward the upper band suggests the asset is becoming overbought, while a move close to the lower band suggests the asset is becoming oversold. Since standard deviation is used as a statistical measure of volatility, this indicator adjusts itself to market conditions.

Since traders of currency look for very incremental moves to profit, recognizing volatility and trend changes quickly is essential. For generally steady ranges of a security, such as many currency pairs, Bollinger Bands act as relatively clear signals for buying and selling. This can result in stop-outs and frustrating losses, though, so traders consider other factors when placing trades in relation to the Bollinger Bands. This next strategy uses a candlestick chart to act as a complementary indicator for fading reversals.

The pullback doesn't have to stall out near the middle line, but it does show strength if it does. Bollinger bands help assess how strongly an asset is rising (uptrend), and when the asset is potentially losing strength or reversing. This information can then be used to help make trading decisions. Here are three guidelines for using Bollinger Bands in an uptrend.

W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms, which form in a downtrends and contain two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. The ability to hold above the lower band on the test shows less weakness on the last decline.

This scan reveals stocks whose Bollinger Bands just expanded rapidly after being contracted for 5 or more days. Normalized Bollinger BandWidth is shown in the Market Carpet, allowing users to compare BandWidth for a number of securities. Using the S&P Sector MarketCarpet as an example, choose Bollinger BandWidth and click the delta icon (little triangle) to view absolute levels. A list of the stocks with the narrowest BandWidth is shown at the bottom right of the Market Carpet (Bottom 5). Users can dive into the sectors by clicking on the sector heading (e.g. Technology).

• ADX is one of the Intraday Trading Indicators that gives information not just about the trend, but also about the strength of the trend.
• If the price is at lower Bollinger Bands, then you can look for bullish RSI divergence to indicate strength in the underlying move.
• The narrow bands are just closer to the price and thus likely to be touched.
• 2 represents the number of standard deviations for the upper and lower band.

Similarly, prices can “walk the band” with numerous touches during a strong uptrend. The upper band is 2 standard deviations above the 20-period simple moving average. It takes a pretty strong price move to exceed this upper band.

Here’s another oscillator, but this time it’s a trend indicator. Average Directional Index (ADX) values range from 0 to 100, and is intended to give you a signal of trend strength.

Because of lower volatility, XLU will have consistently lower BandWidth values than XLK. The 200-day moving average of XLU BandWidth is below 5, while the 200-day moving average of XLK BandWidth is above 7. Next, calculate the standard deviation over the same number of periods as the simple moving average. For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average.

As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather “tags”. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend.

Using the Momentum Indicator in MT4

Another example of this is combining momentum withvolatility measures to form a squeeze momentum indicator. Stochastic Oscillator is one of the momentum trading indicators and certainly one of the best in the herd. It compares the closing price of a security to a range of prices over a specified period of time. Technical analysis is a trading mechanism which is used to analyse the statistics from the price movements and the volumes to predict the further trend of the securities.

Bollinger Bands is a trading indicator (which consist of 3 lines) created by John Bollinger. If you'd like to learn about more indicators, Investopedia's Technical Analysis Course provides a comprehensive introduction to the subject. MACD measures the relationship between two EMAs, while the RSI measures price change in relation to recent price highs and lows.

In addition to basic chart analysis, chartists can also apply complimentary indicators to look for signs of buying or selling pressure within the consolidation. Momentum oscillators and moving averages are of little value during a consolidation because these indicators simply flatten along with price action. Instead, chartists should consider using volume-based indicators, such as the Accumulation Distribution Line, Chaikin Money Flow, the Money Flow Index (MFI) or On Balance Volume (OBV).

A divergence with respect to price may occur on the MACD line and/or the MACD Histogram, however, it is the Price and MACD Histogram Divergence that is the stronger one. Price and MACD Histogram Divergence happens very rarely, but when it does happen it is one of the STRONGEST indications that a bottom or top has reached. The 9 represents the previous 9 bars of the difference between the two moving averages. The 26 represent the previous 26 bars of the slower moving average. The 12 represents the previous 12 bars of the faster moving average.