This strategy uses two of the most popular trading indicators on the market, Bollinger Bands and RSI. They are used to simply find a price “bounce” that occurs during the main trend. The guidelines above are not a trading strategy on their own. A trading strategy requires entry points, exit points, and risk management, which weren’t discussed in this article.

A moving average is just one of those tools, and many different trading strategies do utilise these tools often. Day traders are the most frequent using trailing stop loss orders for maximum profits users of moving averages, and trading strategies. For more information on day trading strategies, check out our day trading strategies page.

Trading strategies with Bollinger Bands indicator

Most often, the price spends no more than four candlesticks above the upper Bollinger Band or below the lower Bollinger Band and then a correction takes place. Knowing this allows trading on the price’s reversal and return to the middle line. This approach works best when the market is in a range or a slow trend. Bollinger bands are popular technical analysis tools used by many traders .when the bands contract because of low volatility; it is called “squeeze’. T And if the bands expand, it can be interpreted as an upcoming period of low volatility. A moving average shows the average price of a security over a certain period of time.

Losing should never be your goal, but you shouldn’t risk your home or life savings trading cryptocurrencies. It’s not that the bands are doing anything wrong or not working. Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room vantage fx anmeldelse for error. Let’s dig deeper into this price action by looking at the charts. Instead, I want to center this piece of the article on how you can use bands to trade bitcoin. This approach is fantastic when you get it right because the reversal will pour money into your account.

Zero commission fees for trading any crypto CFD

It helps understand the market conditions and identify the right moment for entry/exit, which is an essential skill for any trader. A basic overbought/oversold trading strategy can work well using Bollinger Bands, but it can’t be used blindly without consideration for the overall market. So, it won’t work to just buy when price reaches the bottom of the bands or sell when it reaches the top. While this strategy can work very well during range-bound markets, it is a recipe for failure during a trending market. If the trader determines the market is range-bound then trading off the tops and bottoms of the Bollinger Bands will yield success.

John Bollinger recommends using them with two or three other uncorrelated indicators, instead of seeing them as a stand-alone trading system. When the bands squeeze together, it usually means that a breakout is getting ready to happen. What I do before is confirm the candle polarity change for a buy or sell at the upper and lower bands respectively. It has been about 70% efficient but I have always had a reservation that it can work better. I am glad I read this strategy from you and I hope to put it to practice.

What Are Bollinger Bands, and How Are They Used in Trading?

The simplest way to interpret and use Bollinger bands in trading strategies is to view the channel as a measure of the highness or lowness of the price relative to previous trades. It can go either way however, depending on the direction in which the Bollinger Band contracts. A broker definition meaning and example 2020 new advance would start with this squeeze, and a break above the upper band. A new decline would start with a squeeze, and break below the lower band. On our CAPEX.com platform, determining this Bollinger band strategy will be simple, our chart displaying the squeezing clearly.

Because Bollinger Bands measure volatility, the bands adjust automatically to changing market conditions. Notice how when the price is quiet, the bands are close together. Just like in trading, certain technical indicators are best used for particular environments or situations. I prefer use Bollinger Bands and RSI divergence to find high probability reversal trades.

How to use Bollinger Bands in trading?

As a result, as with many other things in life, it’s necessary to find a balance. The band tightens during low volatility and widens during high volatility. The price of a security moving above the upper band points to the overbought scenario, and the price moving below the lower band indicates an oversold scenario. Often, the next price movement is a strong move upwards off the second low.

• The other two bands are reactive to volatility shifts and indicate the two extremes.
• This means that traders will look to place buy orders when prices are at or close to the lower band, and they will place sell orders when prices are at or close to the upper band.
• A moving average shows the average price of a security over a certain period of time.

As seen in the formula above, the price range widens as the standard deviation goes up and vice versa. For example, when the volatility of a given currency pair is low, the channel narrows down. We, at CAPEX.com, understand that getting a handle on Bollinger Bands can be tricky.

This indicator can be used to identify periods when volatility changes as well as potential changes in an asset’s price. In terms of volatility, Bollinger bands are able to show when volatility is reaching extreme lows, relative to the asset’s recent history. They do this by moving toward each other and ‘squeezing’ together. Option traders refer to these low-volatility periods as consolidations.

The narrow bands are just closer to the price and thus likely to be touched. A Keltner Channel is a set of bands placed above and below an asset’s price. The bands are based on volatility and can aid in determining trend direction and provide trade signals. A tag of the upper Bollinger Band® is not in and of itself a sell signal. A tag of the lower Bollinger Band® is not in and of itself a buy signal. The second way traders utilize Bollinger Bands is to trade breakouts.

With this trading method, day traders can pinpoint entry and exits with ease. After examining the picture, it may seem wise to buy every time the price hits the lower band. Or, on the other hand, sell every time the price hits the upper band. This can technically work but is a risky way of trading using the Bollinger Bands. Sometimes strong trends will ride these bands and end up stopping out many unfortunate traders who used that method. In this article, you will find how to use Bollinger bands bounce trading strategy in day trading.

• Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange.
• Buying and selling exactly when the price hits the Bollinger Band is considered to be an aggressive trading approach.
• To continue your research on the Bollinger Bands indicator, please visit John Bollinger’s Official website.
• This acts as a double confirmation of the squeeze and indicates a possible reversal of volatility from low to high in the near future.
• This indicates that the downward pressure in the stock has subsided and there is a shift from sellers to buyers.
• It’s well-suited for range-bound conditions accompanied by close to flat horizontal Bollinger Bands.