Top 3 Trading Secrets Of Bollinger Bands
Developed by famous technical trader, John Bollinger, a Bollinger Band is two standard deviations away from a simple moving average. This popular trading strategy includes 3 main bands that will feature throughout the blog.
Bollinger Bands Calculation
Upper Band is equals to Middle Band + 2 standard deviations.
Middle Band is equals to 20 period moving average (most chart making software use simple moving average instead).
Lower Band is equals to Middle Band -2 standard deviations.
Popular Strategies That Will Help You Trade With Bollinger Bands
Using Bollinger bands indicator in your trading, you can add an extra kick of firepower to technical analysis. Additionally, these factors will help you understand certain characteristics found in trading, i.e. low or high of the day. The Bollinger band indicator will also let you know whether it’s a good time to invest or not.
Following are some strategies that will help you improve your trading game.
- Double Bottoms and Bollinger Bands
This features a double bottom setup. A strong volume features at the preliminary bottom of this formation has a jagged value pullback that closes just outside of the lower band. The move leads to what is known as an automatic rally.
The high of said move serves as the first level (of resistance) in base building process. The most recent lows show up again after the automatic rally commences. This price is set merely to test how much it stands against the buying pressure that came when prices were at the bottom.
Look for the price retest bar inside the lower band as this will indicate prices won’t be on a downward spiral from that moment on. The bar will also indicate a shift from sellers to buyers. Focus on the volume. It can drop off quickly.
- Reversals with Bollinger Bands
This trading strategy is very simple yet incredibly effective. The idea is to fade currency pairs, i.e. buy against the trend when they go outside of the bands. Traders often apply a bit of candlestick analysis to this strategy as well.
Example: Wait and see how the forex pair performs instead of shorting it when stock gaps up through upper band limit. A good indicator of a currency pair performing well in the near term is when it gaps up and closes near pair low but is still completely outside of the Bollinger bands. Look out for this development!
- Bollinger Band Squeeze
In this Bollinger bands strategy, traders estimate beginning of an upcoming squeeze. An indicator known as the Band width will help you understand this strategy.
The Band with Formula is: (Upper Band Value – Lower Band Value)/ Middle Band Value or simple moving average. What to look out for? Indicator reaching its lowest level on the daily chart, in six months as this shows volatility of market will increase.
Additional indications that feature a potential Bollinger band squeeze are: volume expansion, down days, and turn up. Just 2 days back, a nice set up of AUDJPY was observed and several members did well in this short trade.
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