Bollinger bands trading
If you like to avoid being trapped by false reversal signals just ignore the very first two reversal signals when there is a strong trend ongoing. So, I wanted to do my own research and I looked at the most recent price swings of Bitcoin in the Tradingsim platform.
The upper and lower bands are then a measure of volatility to the upside and downside. They are calculated as two standard deviations from the middle band. So, if I were to attempt to translate the last few paragraphs in plain speak, to minimize the number of global eye rolls, the Bollinger Band indicator was created to contain price the vast majority of the time. Regardless of the trading platform, you will likely see a settings window like the following when configuring the indicator.
If you are new to trading, you are going to lose money at some point. This process of losing money often leads to over-analysis. While technical analysis can identify things unseen on a ticker, it can also aid in our demise. In the old times, there was little to analyze. Therefore, you could tweak your system to a degree, but not in the way we can continually tweak and refine our trading approach today. Case in point, the settings of the bands.
While the configuration is far simpler than many other indicators, it still provides you the ability to run extensive optimization tests to try and squeeze out the last bit of juice from the stock. The problem with this approach is after you change the length to My strong advice to you is not to tweak the settings at all.
It's better to stick with 20, as this is the value most traders are using to make their decisions. Now that we have covered the basics let's shift our focus over to the top 6 Bollinger Bands trading strategies. Before we jump into the strategies, look at the below infographic titled '15 Things to Know about Bollinger Bands'.
The information contained in the graphic will help you better understand the more advanced techniques detailed later in this article. Well, the indicator can add that extra bit of firepower to your analysis by assessing the potential strength of these formations.
Let's unpack each strategy, so you can identify which one will work best with your trading style. The first bottom of this formation tends to have substantial volume and a sharp price pullback that closes outside of the lower Bollinger Band. These types of moves typically lead to what is called an "automatic rally. After the rally commences, the price attempts to retest the most recent lows that have been set to challenge the vigor of the buying pressure that came in at that bottom.
Many Bollinger Band technicians look for this retest bar to print inside the lower band. This indicates that the downward pressure in the stock has subsided and there is a shift from sellers to buyers. Below is an example of the double bottom outside of the lower band which generates an automatic rally. In addition, the candlestick struggled to close outside of the bands.
Another simple, yet effective trading method is fading stocks when they begin printing outside of the bands.
Now, let's take that one step further and apply a little candlestick analysis to this strategy. For example, instead of shorting a stock as it gaps up through its upper band limit, wait to see how that stock performs.
If the stock gaps up and then closes near its low and is still entirely outside of the bands, this is often a good indicator that the stock will correct on the near-term. You can then take a short position with three target exit areas: As you can see from the chart, the candlestick looked terrible.
The single biggest mistake that many Bollinger Band novices make is that they sell the stock when the price touches the upper band or buy when it reaches the lower band. Bollinger himself stated a touch of the upper band or lower band does not constitute a buy or sell signal. Notice how the volume exploded on the breakout and the price began to trend outside of the bands; these can be hugely profitable setups if you give them room to fly.
I want to touch on the middle band again. Just as a reminder, the middle band is set as a period simple moving average in many charting applications. The middle line can represent areas of support on pullbacks when the stock is riding the bands. You could even increase your position in the stock when the price pulls back to the middle line.
Regarding identifying when the trend is losing steam, failure of the stock to continue to accelerate outside of the bands indicates a weakening in the strength of the stock. This would be a good time to think about scaling out of a position or getting out entirely. Another trading strategy is to gauge the initiation of an upcoming squeeze.
John created an indicator known as the band width. The idea, using daily charts, is that when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase.
This goes back to the tightening of the bands that I mentioned above. This squeezing action of the bollinger band indicator foreshadows a big move. You can use additional signs such as volume expanding, or the accumulation distribution indicator turning up. We need to have an edge when trading a bollinger band squeeze because these setups can head-fake the best of us. It immediately reversed, and all the breakout traders were head faked. You don't have to squeeze every penny out of a trade.
Wait for some confirmation of the breakout and then go with it. If you are right, it will go much further in your direction. Notice how the price and volume broke when approaching the head fake highs yellow line. To the point of waiting for confirmation, let's look at how to use the power of a Bollinger Band squeeze to our advantage.
Notice how leading up to the morning gap the bands were extremely tight. Now some traders can take the elementary trading approach of shorting the stock on the open with the assumption that the amount of energy developed during the tightness of the bands will carry the stock much lower. Another approach is to wait for confirmation of this belief.
So, the way to handle this sort of setup is to 1 wait for the candlestick to come back inside of the bands and 2 make sure there are a few inside bars that do not break the low of the first bar and 3 short on the break of the low of the first candlestick. Based on reading these three requirements you can imagine this does not happen very often in the market, but when it does, it's something else.
The below chart depicts this approach. Now let's look at the same sort of setup but on the long side. Below is a snapshot of Google from April 26, Notice how GOOG 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. This strategy is for those of us that like to ask for very little from the markets.
Essentially you are waiting for the market to bounce off the bands back to the middle line. You are not obsessed with getting in a position and it wildly swinging in your favor. Nor are you looking to be a prophet of sorts and try to predict how far a stock should or should not run. By not asking for much, you will be able to safely pull money out of the market on a consistent basis and ultimately reduce the wild fluctuations of your account balance, which is common for traders that take big risks.
The key to this strategy is waiting on a test of the mid-line before entering the position. 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. As you can see in the above example, notice how the stock had a sharp run-up, only to pull back to the mid-line. You would want to enter the position after the failed attempt to break to the downside.
You can then sell the position on a test of the upper band. If you have an appetite for risk, you can ride the bands to determine where to exit the position. This is honestly my favorite of the strategies. If I gave you any other indication that I preferred one of the other signals, forget whatever I said earlier. First, you need to find a stock that is stuck in a trading range.
False signals always form. Indeed, the form a lot more than the true signal. True signals are easier to catch, because they are stronger and look outstanding. There are false range breakouts and also false reversal signals.
Those who like to trade the reversal signals, will be encountered with more false signals because a trend can be continued for a long time, and it is not easy to say when it will reverse. If you like to avoid being trapped by false reversal signals just ignore the very first two reversal signals when there is a strong trend ongoing. For example, some traders take a short position when they see the below signal, but as you see this is not a strong signal compared to the signals I showed you above:.
The uptrend is really strong, and this signal is the very first reversal signal on such a strong uptrend. What do I mean by strong uptrend?
Look at the uptrend slope. It is a sharp slope that is going up strongly. There is no sign of exhaustion in it yet. Look at the Bollinger Middle Band Slope the first red arrow. So the trend is still strong and has not formed any sign of exhaustion when this relatively true signal was formed. You could take a short position, but you really had to get out when the continuation signal formed around Bollinger Middle Band. Now look at the below chart and follow the numbers.
Find out why some signals are false, some are true and some are continuation. As you see Bollinger Middle Band works very well with the continuation signals when there is an ongoing strong trend.
In an uptrend, continuation signals are formed when the candlesticks go down, retest Bollinger Middle Band, and then go up again. Taking the continuation signals are much safer than the reversals, unless you make sure that the trend is really close to reverse and is already exhausted.
This was just an introduction how to use Bollinger Bands in taking the reversal and continuation trade setups on the trending and sideways markets. You need to practice more to become expert in locating the true signals. Learn more about Bollinger Bands:. I have studied this most effective indicator explanation and got photo copy for ready reference. Indicator has been explained in very clear manner. I will use this strategy in my trade.
Thanks a much for such demonstration. Great man…I have never seen such a great explanation even upon paying tuition fees. U r really Excellent. I am looking forward article from you regarding candlestick reversal signals and false signals…. I am learning from your article and that would be really helpful for all of us basically for me. So, thanks again and please try to help us to get more skilled with the other ways to do better in trading.
From the start i was stick with the BB indicator but not use it with details. This could help me better in BB.
The break away gap in the last graph at 7 which was tagged relatively true reversal signal is also a confirmation of change in polarity. This occurred just after the bearish engulfing pattern at 7. My question is does break away gap join in fundamental analysis of a trend in such suitation?
Thank you so much. The fact that you explain everything so clearly is amazing. The fact that you also involve real life examples of stocks and having us do questions helped the info sink in even more!
The above article is clear to understand. Mainly, because they are in the Middle Band region and since it is in Middle Band, it could be retesting the Middle Band or breaking away from the Middle Band, how can a novice trader consider continuation and confirmation as a trade setup?
I know we can consider the close price to determine the direction. But, going back on some charts and seeing such signals — it proves to be quite a tricky setup with chance. We have talked about the candlesticks that need confirmation in different articles:.
Also this article talks about the continuation trade setups in more details: Hey Chris my confidence in trading confidently increases by every article of yours I read even without paying a dime More grease to your elbow and more assets in your arsenal,you did quite well and God will bless all your pips Thanks. I am new trader and start trading right now. Explain in a very simple and more efective ways. Chris Pottorff for a such a nice article which specially very helpful for New trader…. Which one should I choose to have exactly the Bollinger Bands you are using to trade?
What time frame is suitable? Here is the answer about time frame: Are you new to Rezze? Then please read this article first: You know I have got it, when I ask less questions. But at the moment, like a sponge I am absorbing your materials. And they are all good and consistent. Referring to point 2 above on reversals. Does it matter to the strength of the setup if in the piercing line above, the upper shadow is also very long. What if both candles with beautiful size and long shadows were out of the BB range, and none made back or crossing into the BB range?
What do you make out of the strength of such a setup? Do you wait for another confirmation? Yes, it is a negative point for a long trade setup: What if the candlestick preceeding 1 was also outside the BB range? Say it went bearish body and shadows under the lower BB, and candlestick 1went up bullish strongly but still outside the lower BB?
Would it have been a good setup? Is this a strong trade setup? What would you score it? Yes, it a score trade setup that we took it and we use it to compare the other short trade setups with: I suggest you to read all the articles listed on the below post carefully and patiently.
What I understand from the number of questions you ask while you have not read the articles carefully, is that you are excited and in a hurry. This is not good for a trader: Thank you for your wisdom. I really appreciate your helpful attitude and being extremely patient with me. You are right that I am excited and in a hurry to understand it. I too have lost a lot of money, and we are not talking about just tens of thousands. In fact, I had decided to not trade again but to just invest using value investing.
But I still got burnt on good companies because of there are just too many variables, e. Hence, I find currencies are much purer. And the market size is so large that it is not easily manipulated. Having said that, I have actually read so many of your articles. Including the one you mentioned above. But because I read so much, whilst I may remember the pattern, I may not remember the currency pair and the dates.
Chris, your article https: I am actually talking about a bullish entry on Are you talking about the same thing? You did go long on This is question was to illustrate whether a breakout where the candles are still outside the range and not making it back into the BB range can still be considered as a strong trade?
Now, you are right about not too hurry it up, and read up the articles patiently. A very important advise. I promise to remind myself on that. I am trying to do backtesting now, and see what the outcome is. We also talked about that too strong weekend gap that GBP cross currency pairs opened with: It was a strong setup on the weekly, but on the daily it formed on a too bearish market when the So we avoided it on the daily. Dear Chris When we look for nearest resistant or support lines some of them turns from downside to upside the other opposite.
So if we think about going long or short which one we should consider? Both or opposite turning point? I hope explanation of my question is clear enough. English not my first language Thank you Dogan. When there is a downtrend or range, a descending resistance is a better choice to go long. And visa versa for going short. Thank you for time to answer me. I hope this is not a silly question.
When I want to go long as using line chart over the price level there are some turning points. I know old support and resistance turning to to each other. Do I need to consider all this turning points as resistance or just only clockwise? Your candlestick explaination is simply superb, i have learned and practised in demo account and was successful.
How can I change that and see exactely what I see in your charts? Hello Chris, thanks for sharing your knowledge and experience. Just a quick question about engulfing strategy, does it also work on weekly and monthly timeframes? With my shortage of experience I think I will probably take 4 false signal because of many positive points. Too strong engulfing candle which is break BUB and engulf too many candles. Abandoned baby candle above BUB before engulfing candle 3.
There are signs of exhaustion and bears pressure. Consolidation for almost three weeks after 3 false signal, which I will consider like hesitation. Based on that market condition I will probably take this trade signal with riskier SL which is good and after being stopped out, continuation candle while gave me new signal to enter on trade.
It is formed by a too long candlestick with a considerable lower shadow. Indeed, it is not a false signal.
It is a bad signal. Thank you so much Chris you are indeed a angel. Practitioners may also use related measures such as the Keltner channels , or the related Stoller average range channels, which base their band widths on different measures of price volatility, such as the difference between daily high and low prices, rather than on standard deviation.
Bollinger bands have been applied to manufacturing data to detect defects anomalies in patterned fabrics. The International Civil Aviation Organization is using Bollinger bands to measure the accident rate as a safety indicator to measure efficacy of global safety initiatives. From Wikipedia, the free encyclopedia. Redirected from Bollinger band. Kirkpatrick and Julie R.
Applied Financial Economics Letters. Quarterly Journal of Business and Economics. Bollinger Bands and the ADX". International Federation of Technical Analysts Journal: Particle Swarm Optimization of Bollinger Bands.
International Conference on Swarm Intelligence. Breakout Dead cat bounce Dow theory Elliott wave principle Market trend.
Hikkake pattern Morning star Three black crows Three white soldiers. Average directional index A. Coppock curve Ulcer index.
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