How to Day Trade with Bollinger Bands: Best Strategies! DTTW

The Bollinger Bands represent the volatility of the asset being traded and the trend and the contraction of the Bollinger Bands indicates a decrease in volatility. Traders use this signal to identify potential breakouts, as a decreasing volatility is often followed by a sharp increase in volatility. Additionally, the bands do not act as support or resistance levels.

During these conditions, there is no way of knowing when the selling pressure will end. Therefore, a protection needs to be in place once the decision to buy has been made. In https://forexhero.info/what-is-renesource/ the NYX example, the stock climbed undaunted after it closed below the lower Bollinger Band® a second time. This is the ideal scenario that the strategy is looking to capture.

What are the best settings for the Bollinger Bands indicator for a 15-minute chart?

If the upper and lower bands are 2 standard deviations, this means that about 95% of price moves that have occurred recently are CONTAINED  within these bands. Just like in the previous example, there was still selling pressure on the stock. While everyone else was selling, the strategy calls for a buy. The break of the lower Bollinger Band® signaled an oversold condition. On December 26, Yahoo again tested the lower band, but did not close below it.

I honestly find it hard to determine when bitcoin is going to take a turn looking at the bands. The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin. In addition to strategies, there are a few items related to bands I need to cover that will provide you with a full picture of the indicator.

Great Bollinger Band® Trading Strategies

There is no need to adjust these, as we will use the default settings. Here you can learn How to fade the momentum in Forex Trading. The purpose of these bands is to give you a relative definition of high and low. So in theory, the prices are high at the upper band and low at the lower band. Bollinger Bands include three different lines, the upper, middle, and lower bands. The middle band basically serves as a baseline for both the upper and lower.

The chart thus expresses arbitrary choices or assumptions of the user, and is not strictly about the price data alone. To implement the strategy, traders would look for a contraction in the Bollinger Bands and wait for the price to break out of the bands. They would enter a long position if the price breaks above the upper Bollinger Band or a short position if the price breaks below the lower Bollinger Band. To manage risk, they would set a stop-loss order on the opposite side of the breakout. The Bollinger Band squeeze strategy is used by traders to identify potential breakout opportunities in a range-bound market.

How does the Bollinger Bands indicator work?

This shows clearly that the average rate and the spot rate are converging meaning that the trend momentum is slowing down. As such, one needs not to understand the background but the concept behind it. In fact, only a very few traders have the knowledge about the mathematical background of the Bands. Unfortunately, there is no definitive system that can accurately tell a trader when to enter or leave a trade.

For example, when the price reaches the upper band, and a bearish candlestick pattern forms, traders can enter a short position, expecting the price to revert to the moving average. Conversely, when the price reaches the lower band, and a bullish candlestick pattern forms, traders can enter a long position, expecting the price to revert to the moving average. This is a theory that the price of an asset will tend to revert to its average price over time. For instance, if the asset price falls ‘too much’, it will tend to revert to a ‘normal’ price.

Bollinger Bands Excel Sheet

Therefore, we can talk about a signal for the upcoming bounce. You can set the stop order, as in previous trading methods, at the high or low point of the breakout candle. The initial take profit must be at least twice the stop loss length. Since we are talking about trend trading decissions, it makes sense to use the trailing stop and wait for the signal of the trend end.

• These include a simple moving average​ (SMA) and exponential moving average​ (EMA).
• The next narrowing of the channel is marked by green arrows in the chart.
• For a downtrend, the stop order position is determined by the high of the first bar that breaks the lower line of the neutral zone.
• At the same time, the stochastic oscillator was in the overbought area (2), which was another alert of a potential drop in price.
• But with traditional analysis, there is no need to analyze all the constituent figures.

Since Keltner Channels use average true range rather than standard deviation, it is common to see more buy and sell signals generated in Keltner Channels than when using Bollinger Bands®. The average true range (ATR)​​ is a technical indicator that measures volatility. Originally designed for analysing commodities, it can be applied to other instruments such as indices and stocks. These components make it easier to create custom indicators and self-executing positions, resulting in a more streamlined and efficient trading strategy. Consider the possibility of the market staying in an oversold or overbought state for a long duration when a major news or economic update is awaited, or after such an announcement. Despite the signal being correct, a trend reversal in the market may take much longer than usual.

Best way of using Forex pivot point indicator in trading

If you are just starting out as a trader, it is best to first master the Bollinger Bands trending strategy on a large timeframe. You can get invaluable experience in trading the Bollinger Bands strategies mentioned in this article on a Litefinance demo account completely free of charge and without registering. In the chart, the blue middle band channel represents standard bands based on a 20-period moving average.

That is, when a crypto’s price moves above the upper Bollinger band, this is an indication that the coin is overbought and is likely to correct shortly. This presents an ideal time to sell before the coin’s price will fall. On the flip side, if a crypto’s price tags at and falls below the lower Bollinger band, this is an indication that the coin is oversold. The neutral zone is the area between the upper first SD and the lower first SD. When the price is in the neutral zone, it is basically directionless, and traders should not look to place any orders in the market.