The bollinger bands stocks strategy guide

• Periods of market consolidation• Periods of upcoming large volatility breakouts • Possible market tops or bottoms, and potential price targets The Bollinger Bands® consist of three ban

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The Bollinger Bands Forex

Strategy Guide

September 16, 2020 07:45 UTC

Reading time: 24 minutes

In this article, we will provide a comprehensive guide on how to trade with Bollinger Bands in Forex trading We will explain what they are and how to use and interpret them We will then provide three Forex trading

strategies which utilise Bollinger bands, before explaining a few more advanced trading strategies for you to consider!

What Are Bollinger Bands?

John Bollinger, creator of the Bollinger Bands® defines them as

''a technical analysis tool, they are a type of trading band or envelope'' Bollinger bands use a statistical measure known as the standard

deviation, to establish where a band of likely support or resistance levels might lie This is a specific utilisation of a broader concept known as

a volatility channel

A volatility channel plots lines above and below a central measure of price These lines, also known as envelopes or bands, widen or contract according to how volatile or or non-volatile a market is Bollinger Bands® measure market volatility and provide lots of useful information, including:

• Trend continuation or reversal

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• Periods of market consolidation

• Periods of upcoming large volatility breakouts

• Possible market tops or bottoms, and potential price targets

The Bollinger Bands® consist of three bands, which revolve around a centred simple moving average (SMA), with the default value of 20, of which 85% of the time, the price is held within the following default

boundaries:

• Lower band – SMA (minus two standard deviations)

• Upper band – SMA (plus two standard deviations)

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Interpreting Bollinger Bands and How

They Work

The most basic interpretation of Bollinger bands is that the channels

represent a measure of 'highness' and 'lowness' Let's sum up three key points about Bollinger bands:

1. The upper band shows a level that is statistically high or expensive

2. The lower band shows a level that is statistically low or cheap

3. The Bollinger band width correlates to the volatility of the market This is because the standard deviation increases as the price ranges

widen and decrease in narrow trading ranges

Therefore:

• In a more volatile market, Bollinger bands widen

• In a less volatile market, the bands narrow

The Bollinger Bands® contain a default setting in Forex as (20,2) As the market volatility increases, the bands will widen from the middle SMA Conversely, as the market price becomes less volatile, the outer bands will narrow When using trading bands, it is the action of the price (or price action) as it nears the edges of the band that should be of particular

interest to us

For a technical analyst trader, trading near the outer bands provides an element of confidence that there is resistance (upper boundary) or

support (bottom boundary), however, this alone does not provide

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relevant buy or sell signals; all that it determines is whether the prices are high or low, on a relative basis

Given this information, a trader can enter either a buy or sell trade by using indicators to confirm their price action Trading bands are lines plotted around the price to form what is called an "envelope" Remember, the action of prices near the edges of such an envelope is what we are particularly interested in The default Bollinger Bands® formula consists of:

• A N-period moving average (MA)

• An upper band at K times and a N-period standard deviation above the moving average (MA + Kσ)

• A lower band at K times and a N-period standard deviation below the moving average (MA − Kσ)

The Bollinger Bands® can be applied to virtually any market or security For all markets and issues, a 20-day Bollinger band calculation period is a good starting point, and traders should only stray from it when the

circumstances compel them to do so As you lengthen the number of periods involved, you need to increase the number of standard deviations employed At 50 periods, two and a half standard deviations are a good selection, while at 10 periods; one and a half perform the job quite well

Double Bollinger Bands Strategy

Kathy Lien, a well-known Forex analyst and trader, described a very good trading strategy for the Bollinger Bands indicators, namely, the DBB – Double Bollinger Bands trading strategy In her book 'The Little Book of Currency Trading', she wrote that this was her favourite method The DBB can be applied to technical analysis for any actively traded asset traded

on big liquid markets such as Forex, stocks, commodities, equities, bonds, etc

This is how you apply it on your chart:

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• Insert the Bollinger Bands® on the chart

• Go to 'Settings' and select two standard deviations and a 20 period SMA

• Insert a second set of the Bollinger Bands® with a different colour

• Go to 'Settings' and select 1 standard deviation and a 20-period SMA

Depicted: Admiral Markets MetaTrader 5 Trading Platform - Settings for Bollinger Bands

When the chart has been set up, we need to mark the zones next

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Depicted: Admiral Markets MetaTrader 5 Supreme Edition GBPJPY H4 Chart Date Range: 24 June 2020 - 28 July 2020 Captured 28 July 2020 Disclaimer: Charts for financial instruments in this article are for

illustrative purposes and do not constitute trading advice or a solicitation

to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares) Past performance is not necessarily an indication of future performance.

• A1: The upper Bollinger Band® (BB) line that is two standard

deviations away from line X, which is the 20-period SMA

• B1: The upper BB line that is one standard deviation from the

20-period SMA

• X: The 20-period SMA This serves as both the centre of the DBBs,

and the baseline for determining the location of the other bands

• B2: The lower BB line that is one standard deviation from the

20-period SMA

• A2: The lower BB line that is two standard deviations from the

20-period SMA

These bands represent four distinct trading zones used by traders to place trades

• The Buy Zone is between lines A1 and B1

• The Neutral Zone 1 between lines B1 and X

• The Neutral Zone 2 between lines X and B2

• The Sell Zone is between lines B2 and A2

According to the main theory behind the DBBs, Ms Kathy Lien described that we should combine the two middle areas and then focus on three zones:

1. The upper quarter

2. The middle half

3. The bottom quarter

The DBB Buy Zone

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When the price is within this upper zone (between the two upper lines, A1 and B1), it tells us that the uptrend is strong, and that there is a higher chance that the price will continue upward As long as the

price candles continue to close in the topmost zone, the odds favour

maintaining current long positions or even opening new ones

The DBB Sell Zone

When the price is in the bottom zone (between the two lowest lines, A2 and B2), the downtrend will probably continue That tells us that as long

as the candles close in the lowest zone, a trader should maintain current short positions or open new ones

The DBB Neutral Zone

When the price gets within the area defined by the one standard deviation bands (B1 and B2), there is no strong trend, and the price is likely to

fluctuate within a trading range, because momentum is no longer strong enough for traders to continue the trend The 20-day simple moving

average (X) that serves as the baseline for the Bollinger Bands® is in the centre of the zone

According to the rules, whichever zone the price is in will signal whether you should be trading in the direction of the trend, long or short,

depending on whether the trend is increasing upward or decreasing

downward Basically, if the price is in the upper zone, you go long, if it's in the lower zone, you go short If the price is in the two middle quarters (the neutral zone), you should restrain from trading (if you are a pure trend trader), or trade shorter-term trends within the prevailing trading range Usually, traders trade higher time frames such as H4 or operate on a daily basis with this strategy

The Bollinger Bands® Forex Scalping

Strategy

Our next Bollinger bands Forex trading strategy is for scalping Five

indicators are applied to the chart, which are listed below:

1. Bollinger Bands® (14,1), green

2. Admiral Markets Pivot (H1) - For target and stop loss levels

3. Bill Williams' Awesome Oscillator

4. RSI (14)

5. EMA (Exponential Moving Average) - (4), red

The time frame for trading this Forex scalping strategy can be either 1 minute, 5 minutes, or 15 minutes Targets are Admiral Pivot points, which are set on a H1 time frame A stop loss is placed below the interim

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Admiral pivot support (for long trades) or above the interim Admiral Pivot resistance (for short trades) This Bollinger Band scalping system should ideally be traded with major Forex currency pairs Below we have applied the above indicators to charts on a 5 minute time frame

Buy Trade

Depicted: Admiral Markets MetaTrader 5 Supreme Edition - AUDUSD M5 Chart Date Shown: 16 September 2020 Captured: 16 September

2020 Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation

A buy trade is entered when the red 4 EMA crosses up through the middle Bollinger Band®, at the same time, the Awesome Oscillator should be crossing their zero lines, going up, and the RSI should be coming up and crossing its 50 line In the chart above, there are two such opportunities highlighted by the red vertical lines

Sell Trade

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Depicted: Admiral Markets MetaTrader 5 Supreme Edition - USDCHF M5 Chart Date Shown: 16 September 2020 Captured: 16 September

2020 Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation

For sell positions, you are looking for the opposite conditions of buy

trades The 4 EMA needs to be crossing below the middle Bollinger band,

at the same time as the Awesome Oscillator is crossing below the zero line and the RSI is crossing below the 50 line In the chart above, there are two sell indicators marked by the red vertical lines

The Admiral Markets Pivot is one of many additional indicators available with the Admiral Markets MetaTrader 5 Supreme Edition on This

add-on is FREE to download for customers of Admiral Markets, simply click the banner below to download today:

Bollinger Band® Squeeze Trading Strategy with Admiral Keltner

This Bollinger bands Forex trading strategy uses two indicators:

1. Bollinger Bands

2. Admiral Markets Keltner

With both the Bollinger Bands® and Admiral Keltner indicators, traders should consider using the following default settings that are used on the vast majority of trading platforms:

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• Bollinger Bands: (20, 2)

• Keltner Channels: Length 20

There are a lot of Keltner channel indicators openly available in the

market However, there are two versions of the Keltner Channels that are most commonly used The Admiral Keltner is possibly one of the best versions of the indicator in the open market, due to the fact that the

bands are derived from the Average True Range

You should not only be sure that you're using the formulation that uses the Average True Range, but also that the centre line is the 20-period

exponential moving average The Admiral Markets Keltner indicator has all the settings correctly coded in the indicator itself, and, for this strategy, it should look like this:

Depicted: Admiral Markets MetaTrader 5 Supreme Edition - Admiral

Keltner Indicator Settings

With the Bollinger bands, standard deviation is determined by how far the current closing price deviates from the mean closing price The general concept is that the farther the closing price is from the average closing price, the more volatile a market is deemed to be, and vice versa That is what determines the degree of contraction or expansion of a Bollinger Band®

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Depicted: Admiral Markets MetaTrader 5 Supreme Edition - GBPJPY H4 Chart Date Range: 22 June 2020 - 20 July 2020 Captured: 28 July 2020 Disclaimer: Charts for financial instruments in this article are for

In the chart above, at point 1, the blue arrow is indicating a squeeze At point 2, the blue arrow is indicating another squeeze What's difficult about this situation is that we still don't know if this squeeze is a valid breakout What we now need to do is quantify how narrow the squeeze should be in order to qualify for a Bollinger Bands® With Admiral Keltner Breakout Strategy breakout setup

The way we do this is to add the Admiral Keltner channel to the chart:

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Depicted: Admiral Markets MetaTrader 5 Supreme Edition - GBPJPY H4 Chart Date Range: 22 June 2020 - 20 July 2020 Captured: 28 July 2020 Disclaimer: Charts for financial instruments in this article are for

• Bollinger Bands = Green

• Keltner Channel = Red

In the chart above, we have the Admiral Keltner Channel overlaid on top of what you saw in the first chart, so we can start looking for a proper

squeeze

You should only trade a setup that meets the following criteria:

• Consider only placing a Bollinger Bands® With Admiral Keltner Breakout Strategy trade when both the upper and lower Bollinger Bands® go inside the Keltner Channel That is the only 'proper way'

to trade with this strategy

• The yellow highlighted columns depict examples of the Bollinger Bands® (green lines) going inside the Keltner Channel (red lines)

• At those zones, the squeeze has started

• When the Bollinger Bands® (both green lines) start to come out of the Keltner Channel (red lines), the squeeze has been released, and

a move is about to take place

• Wait for a buy or sell trade trigger

This is demonstrated in the chart below:

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