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Using Bollinger Bands to Gauge Trends

Bollinger bands strategy

If the line is going up, it is an uptrend, if it’s going down, it is a downtrend. In theory, Bollinger Bands will contain all trading activity that occurs within 2 standard deviations of the expected norm (the trend line). It’s important to know that most prices are contained within one and two standard deviations. As the name suggests the double Bollinger bands strategy uses 2 Bollinger bands instead of just one. This means that the buy and sell signals are two times more powerful.

How effective are Bollinger Bands?

Interestingly, Bollinger Bands are able to capture about 90% of the price action in a given asset or cryptocurrency. When the asset's price moves above or below a set Bollinger band, this means that trading opportunities are being presented.

Just like in trading, certain technical indicators are best used for particular environments or situations. In a different example, Yahoo broke the lower band on December 20, 2006. The strategy called for an immediate buy of the stock the Bollinger bands strategy next trading day. This is an indicator that I made to see how far past prices could affect the future prices. And I found some very interesting and beautiful things about it, and I wanted to share them with you, so I publish this…

Bollinger Band and Keltner Channel Trading Strategy

As with the bounce strategy, the key to getting this right is confirming the market direction before getting into a trade, avoiding false signals. For breakouts through the upper Bollinger Band, the signal to buy is the next candle that has a higher high, and closes higher, than the signal candle (see image above). For breakouts downwards through the support levels, that is the Lower Bollinger Band, the entry signal to sell the market is a candle with a lower low and a lower close than the signal candle. It has flaws and won’t produce reliable signals all the time. It can help you stay on the right side of trend and spot potential reversals. For that, you’ll need to set up the indicators so they align with the guidelines discussed above.

This bearish signal does not last long because prices quickly move back above the lower band and proceed to break the upper band. He also served on the board for the Market Technicians Association (MTA) and also on the Federation of Technical Analysts (FTA). He based his Bollinger Bands on Keltner Bands and similar to Donchian channels and focused on volatility standard deviation to make his bands more adaptive.

Rule #4: After the price hits the lower Bollinger Band, and RSI is going upwards, make an entry when…

Notice how the price and volume broke when approaching the head fake highs (red line). In an M pattern, if the market price hits two highs consecutively with a decline in the middle, it’s seen as a bearish reversal pattern – meaning the market price is likely to fall. Bollinger bands can help confirm this resistance level if the price bounces off the top line back toward the middle. When price action is close to the upper band, the current price of the instrument is considered high relative to recent prices. If they cross the upper band, traders consider the instrument to be overbought.

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  • The upper and lower bands are then typically set at a certain number of standard deviations away from the moving average, with two standard deviations being the most commonly used value.
  • When prices move too far away from the mean, it’s believed that they will eventually come back to it.
  • Traders should also be aware of the limitations of Bollinger Bands and not rely solely on them for making trading decisions.
  • This strategy relies on the fact that after deviating too much from the average level, the price tends to return to it.

Let’s dig deeper into this price action by looking at the charts. Instead, I want to center this piece of the article on how you can use bands to trade bitcoin. It affords you the flexibility of jumping on a hot stock while lowering your risk as you wait for the pullback. You could argue that you don’t need the bands to execute this strategy.

What are the benefits of using the Bollinger Bands Bounce trading strategy?

In the second «Style» tab, you can set the color of the Bollinger bands, the moving average, and the chart area between them. I have learned another improved way of using the Bollinger Band indicator. What I do before is confirm the candle polarity change for a buy or sell at the upper and lower bands respectively. It has been about 70% efficient but I have always had a reservation that it can work better. I am glad I read this strategy from you and I hope to put it to practice. Another strategy of using Bollinger Bands is in trend following.

What time frame is best for Bollinger Bands?

Bollinger Bands typically use a 20-period moving average, where the ‘period’ could be 5 minutes, an hour or a day.

At the same time, the price should not be outside the channel for longer than several candles. Bollinger Bands are an effective and common technical analysis indicator that is used by traders in order to understand the price volatility of a specific financial instrument. This indicator was named after its creator, John Bollinger, a famous technical analyst, who created them back in the 1980s.

Bollinger Bands vs Keltner Channel

Likewise, having the standard deviation value too close to the average (less than 2) can lead to a lot of false signals as the market hits the bands repeatedly due to a smaller width. Once the indicator is set up and seemingly working well, the indicator may still have a tendency to produce false signals. During low volatility times, the bands will contract, especially if the price is moving sideways.

Advanced Technical Analysis Techniques For Binary Options Trading: Fibonacci Retracement, Bollinger Bands, And More – Crypto Mode

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You shouldn’t overestimate the capabilities of the Bollinger Bands either. This indicator needs to be tested with your trading strategy. This is the only way you can understand whether this indicator is useful to you or not. The key nuance in setting up Bollinger Bands is maintaining the optimal ratio between the period of the moving average and the number of standard deviations.

Crypto trading strategies with Bollinger Bands

You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend and there is a sizable amount of volatility. Notice how NIO gapped up over the upper band on the open, had a small retracement back inside of the bands, then later exceeded the high of the first candlestick. These sorts of setups can prove powerful if they end up riding the bands.

The idea in a trending market is to find easy ways to join or enter the dominant trend. This means finding quality price points after a retracement or pullback in the market. In a strong uptrend, Bollinger Bands will slope upwards, with prices generally ‘hugging’ the upper band.

Which indicators work best with Bollinger Bands?

Bollinger Bands can be used in combination with different indicators, like RSI, as well as support and resistance, moving averages, and any other research tools that may support your analysis.