Bollinger Band Strategy
Trading Strategies I Professional Trading
The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow. According to John Bollinger, periods of low volatility are often followed by periods of high volatility.
Learning Tip
A volatility contraction or narrowing of the bands can foreshadow a significant advance or decline. Once the squeeze play is on, a subsequent band break signals the start of a new move.
Understanding
Indicators and Strategy
Bollinger band is a trading indicator which you will find in your trading chart.
For illustration purposes, we are using the Bollinger Bands at 20 periods and two standard deviations, which are the default settings. Bollinger Bands start with the 20-day SMA of closing prices.
The upper and lower bands are then set two standard deviations above and below this moving average. The bands move away from the moving average when volatility expands and move towards the moving average when volatility contracts.
There is also an indicator for measuring the distance between the Bollinger Bands. This indicator is called Bollinger BandWidth. It is simply the value of the upper band less the value of the lower band.
Method
Steps to Apply
You can trade using this method in two ways: for upside move and for downside move. Here we have explained the two ways. Please note that always trade for upside move in bullish market and trade for downside in bearish market to increase chances of success.
Upside Trading: Use below mentioned steps to create bullish positions.
1. First, look when Bollinger Bands narrow on the price chart. This is the period of low volatility.
2. Check Bollinger BandWidth Indicator if it is near the low end range. This further confirms low volatility.
3. Finally, see if price breaks above the upper band or below the lower band. If breaks above then it’s bullish entry.
Target / Exit Process: Please always trade with a calculated risk-reward ratio. Exit your trade immediately if max. calculated risk level (stoploss) has touched to save from further loss or reward level (target) level has reached to book profits.
Downside Trading: Use below mentioned steps to create bearish positions.
1. First, look when Bollinger Bands narrow on the price chart. This is the period of low volatility.
2. Check Bollinger BandWidth Indicator if it is near the low end range. This further confirms low volatility.
3. Finally, see if price breaks above the upper band or below the lower band. If breaks below then it’s bearish entry.
Target / Exit Process: Please always trade with a calculated risk-reward ratio. Exit your trade if max. calculated risk level (stoploss) touches to save from further loss or reward level (target) level has reached to book profits.
Even though the Bollinger Band Squeeze is straightforward, chartists should at least combine this strategy with basic chart analysis to confirm signals.
For example, a break above resistance can be used to confirm a break above the upper band. Similarly, a break below support can be used to confirm a break below the lower band. Unconfirmed band breaks are subject to failure.
Because the Bollinger Band Squeeze does not provide any directional clues, chartists must use other aspects of technical analysis to anticipate or confirm a directional break.
In addition to basic chart analysis, chartists can also apply complimentary indicators to look for signs of buying or selling pressure within the consolidation.
