Forex bollinger band system
The middle line of the indicator is the simple moving average SMA of the instrument's price, which is the average of the price over a certain length of time. This is generally set to a day period. The lower band is the SMA minus two standard deviations.
Bollinger Bands look like an envelope around the price of the instrument. The widths of the bands are determined by the standard deviation. Standard deviation refers to the volatility of the instrument's price movements.
This is generally set to 2. Bollinger Band calculation formula The period is the number of intervals that are included in the Bollinger Band calculation. A setting of 20, 2 means that the period and standard deviation are set to 20 and 2. The settings can be adjusted to suit different trading styles. When the instrument's price moves towards the upper band, this is a signal that it is overbought. As a general rule, traders look to sell when they believe that an instrument is overbought.
When the instrument's price moves towards the lower band, this is a signal that it's oversold. Generally, traders look to buy securities that are oversold. As a trading indicator, Bollinger Bands are not perfect. Consequently, they are best used alongside other similar technical analysis indicators to provide more accurate trading signals. These are used by traders to determine trend direction. A moving average shows the average price of a security over a certain period of time. The basic rule of moving averages is that if a security's price is above the moving average, the trend is up.
If the price is below the moving average, the trend is down. There are also different types of moving averages. These are useful for predicting trend reversals. Stochastics measure the momentum of price movements. Like Bollinger Bands, Stochastic indicators can help traders identify overbought and oversold levels.
Originally designed for analysing commodities, it can be applied to other instruments such as indices and stocks. A security experiencing a high level of volatility will have a higher ATR. A security experiencing low volatility will have a low ATR. Traders use ATR to identify entry and exit points. It can be a useful tool when combined with other trading indicators. The key difference is that Keltner Channels use the average true range to set the band widths, instead of standard deviation.
Keltner channels also use an exponential moving average as the middle line. Some of the more popular trading strategies that can help traders in bear or bull markets include: Riding the bands Many traders mistakenly believe that because a security's price has touched the upper band they should go short, or vice versa.
However, such price movements should not be viewed as signals to buy or sell. Price penetration of the bands alone is not an indicator to enter a trade. This is because during a strong uptrend or downtrend, prices can often stick within the bands. Bollinger Band squeeze This strategy uses an indicator named 'band width'.
Most of the money to be made in the market, with minimal risk, is in the margins. The same way we say football is a game of inches, trading is the same. Example First, you need to find a stock that is stuck in a trading range. The greater the range, the better. Trading Range Now, looking at this chart, you may feel a sense of boredom overcoming you. However, from experience, the traders that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day.
In the above example, simply buy when a stock tests the low end of its range and the lower band. Conversely, you sell when the stock tests the high of the range and the upper band. Bands Help Identify Ranges The key to this strategy is a stock having a clearly defined trading range. This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far.
However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands. A simpler way of saying this is that the bands help validate that the stock is stuck in a range. So, instead of trying to win big, you just play the range and collect all your pennies on each price swing of the stock.
What if the Bands Fail? This section is going to feel like a nice cold splash of water right in your face. Like anything else in the market, there are no guarantees. No doubt, Bollinger Bands can be a great tool for identifying volatility in a security, but it can also prove to be a nightmare when it comes to newbie traders.
Like any other trade signal, you will need to exit your position without reservation. Not exiting your trade can almost prove disastrous as three of the aforementioned strategies are trying to capture the benefits of a volatility spike. For example, imagine you are short a stock that reverses back to the highs and begins riding the bands. What would you do? Let me help you out if you are confused — kill the trade! While there is still more content for you to consume, please remember one thing — you must have stops in place!
Which Strategy Works Best? This is the important question for anyone reading this article. But it is such a tough question to answer. For me, there are two strategies that I prefer to use — 5 and 6. But we all have different personalities and trading styles. Both of these work well, but in two very different types of markets. It affords you the flexibility of jumping on a hot stock while lowering your risk as you wait for the pullback.
I have been a breakout trader for years. But I will be the first to tell you that most breakouts fail. Not to say pullbacks are without their issues, but you can at least minimize your risk by not buying at the top. Strategy 6 — Trade Inside the Bands This approach will work well in sideways markets and will also have a high winning percentage. How do I know it has a high winning percentage?
Because you are not asking much from the market in terms of price movement. From my personal experience of placing thousands of trades, the more profit you search for in the market, the less likely you will be right. Now, while strategies 5 and 6 work best for me, what say you? The trader that is going to scan the entire market looking for a particular setup. It will require a lot of patience to identify the setup since you need the second bottom to breach the bands to generate a powerful buy signal.
Strategy 2 Reversals — calling all risk takers! This approach is fantastic when you get it right because the reversal will pour money into your account. However, get things wrong, and the pain can often leave you paralyzed from taking any action. You must be quick on your toes and willing to cut a loser without blinking.
Strategy 3 Riding the Bands — for the home run hitters. Well, I have tried systems that have low win percentages, and I have failed every time. This is because I am a sore loser. So, if you want to take less action and can seriously handle being wrong eight out of ten times, this system will be perfect for you.
Strategy 4 The Squeeze — this is the best setup for the traders that want the profit potential of riding the bands but can take quick money as things go in your favor. You can take one of two approaches with the squeeze strategy. For the riskier traders, you can jump in before the break and capture all of the gains.
More conservative traders can wait for the break and then look for a pullback setup in the direction of the primary trend. Strategy 5 Playing the Moving Average — this is for the dip buyers. You are looking for stocks that are trending strongly and then react back to the period moving average. This setup works lovely when day trading the Nikkei and usually develops a little after forty-five minutes into the session. Strategy 6 Trading the Range — for the edge traders.
So, if you need thrills, this strategy will put you to sleep. You will likely want to focus on 2, 3, or 4. Bollinger Bands and Cryptocurrencies In addition to strategies, there are a few items related to bands I need to cover that will provide you with a full picture of the indicator. Instead, I want to center this piece of the article on how you can use bands to trade bitcoin. Bitcoin Volatility I was reading an article on Forbes, and it highlighted six volatile swings of bitcoin starting from November through March Doing my research, I looked at some of these price swings of Bitcoin in the Tradingsim platform.
These price swings are breathtaking! During this period, Bitcoin ran from a low of 12, to a high of 16, That kind of money that fast can be hard to grasp. The psychological warfare of the highs and the lows become unmanageable. So, it got me thinking, would applying bands to a chart of bitcoin futures have helped with making the right trade?
Bitcoin with Bollinger Bands I indicated on the chart where bitcoin closed outside of the bands as a possible turning point for both the rally and the selloff. You must honestly ask yourself if you will have the discipline to make split-second decisions to time this trade, just right. The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin.
Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error. I do not trade bitcoin. But after looking at the most recent price swing using bands, a couple of things come to mind: Honor your stops. Only invest money you are willing to lose. Short with caution. Cryptocurrencies can go on massive runs in a short period, so you need to make sure you honor those stops and have enough cash on hand to avoid margin calls.
In the previous section, we talked about staying away from changing the settings. Well, if you think about it, your entire reasoning for changing the settings in the first place is in hopes of identifying how a security is likely to move based on its volatility. A much easier way of doing this is to use the Bollinger Bands width. In short, the BB width indicator measures the spread of the bands compared to the moving average to gauge the volatility of a stock.
Why is this important to you? Essentially, you have an actual reading of the volatility of a security. You can then look back over months or years to see if there are any repeatable patterns of how price reacts when it hits extremes. Example To see this in action, look at the below screenshot using both the Bollinger Bands and Bollinger Band width. The other point of note is that on each prior test, the high of the indicator made a new high, which implied the volatility was expanding after each quiet period.
As a trader, you need to separate the idea of a low reading with the Bollinger Bands width indicator with the decrease in price. Remember, Bollinger Band width is informing you that a pending move is coming, the direction and strength are up to the market.
If you had just looked at the bands, it would be nearly impossible to know that a pending move was coming. You would have no way of knowing that. This is always a fun question: Can an indicator somehow provide you clues of a major price swing? With the bull market in full force in , volatility dropped to a multi-year low.
I want to dig into the E-Mini because the rule of thumb is that the smart money will move the futures market which in turn drives the cash market. Who Knew A Top was In? Looking at the chart of the E-mini futures, the peak candle was completely inside of the bands. Other than the fact the E-mini was riding the bands for months, how would you have known there was a big break coming?
Remember in Chapter 4, the Bollinger Band width can give an early indication of a pending move as volatility increases. Volatility Breakout In the above example, the volatility of the E-Mini had two breakouts prior to price peaking. First, the Bollinger Band width had been coiling for approximately five months before breaking out. After these early indications, the price went on to make a sharp move lower and the Bollinger Band width value spiked. Applying Bollinger Bands to a Volatility Indicator The inspiration for this section is from the movie Teenage Mutant Ninja Turtles, where Michelangelo gets super excited about a slice of pizza and compares it to a funny video of a cat playing chopsticks with chopsticks.
To this point, we applied bands to the Proshares VIX Short-Term Futures to see if there were any clues before the major price movement we discussed earlier. VIXY Chart Does anything jump out that would lead you to believe an expanse in volatility is likely to occur? Look hard and resist the urge to scan a few inches down the page for the answer. But at this point, you would have missed a large portion of the initial breakdown in price.
Being Late When you are trading in real-time, the last thing you want to do is show up late to the party. More times than not, you will be the one left on cleanup after everyone else has had their fun. During this time, the VIXY respected the middle band. There was one period in late November when the candlesticks slightly jumped over the middle line. But there was no follow through and it immediately rolled over. However, in late January, you can see the candlesticks not only closed above the middle line but also started to print green candles.
And that might be a fair statement. You would need a trained eye and have a good handle with market breadth indicators to know that this was the start of something real. There was one other clue on the chart. Can you see it? U Shape Volume There is the obvious climactic volume which jumps off the chart, but there was a slight pickup in late January, which was another indicator that the smart money was starting to cash in profits before the start of the correction.
If memory serves me correctly, Bollinger Bands, moving averages, and volume were my first indicators as a beginner trader.
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