Bollinger Band Strategy With Free Indicator

You’ve probably heard this a gazillion times.

If you want to make money in the markets, just buy low and sell high.

But the question is… HOW?

Well, you can do so with Bollinger Bands (duh).

Recall:

The outer Bollinger Bands are 2 standard deviations away from the mean.

This means if the price is in the lower band, it’s considered “cheap”. And if it’s in the upper band, it’s considered “expensive”.

But before you think…

“Great! I’ll just go long when the price reaches the lower band.”

Not so fast my young Padawan.

If you want to have a higher probability of success with the Bollinger Band strategy, then you’ll need a few confluence factors coming together before you trade the bands.

For example:

• Look to long the lower band in an uptrend (and vice versa)
• Reversal candlestick patterns that show signs of reversal
• The outer bands coincide with Support and Resistance

Here’s an example:

The price of EUR/USD is at the lower Bollinger Band that coincides with Support, and it formed Bullish Engulfing pattern.

Pro Tip: You can adjust your Bollinger Bands settings to 3 standard deviations (or higher) to identify even more overbought/oversold levels to trade-off. This can drastically improve your Bollinger Band strategy depending on the market condition.

Moving on…

Bollinger Bands Squeeze: How to identify explosive breakout trades about to occur

Here’s a fact:

Volatility is always changing.

The markets move from a period of high volatility to low volatility (and vice versa).

If you’re a new trader, it can be difficult to identify the volatility of the markets.

So, this is where a Bollinger Bands strategy can help because it contracts when volatility is low and expands when volatility is high.

Here’s an example:

So, the question is…

How do you use Bollinger Bands to anticipate a possible breakout?

Simple.

You look for the Bollinger Bands to contract (or squeeze) because it tells you the market is in a low volatility environment.

Why?

Because volatility tends to expand after contraction!

An example: Before the breakdown, Crude Oil is in a low volatility environment (as shown by the contraction of the bands).

Pro Tip: The longer the volatility contraction, the stronger the subsequent breakout will be.

How to identify the direction of the breakout

Now…

Although Bollinger Bands can alert you to potential breakout trades, it doesn’t tell you the direction of the breakout.

However, you don’t need to be Einstein to figure out where the market is likely to go.

Because all you need to do is look at the trend.

Look at the chart below:

Where do you think the market is likely to breakout, higher or lower?

Probably lower because the trend is down.

And you’re right because the market broke down lower (yes I cherry-picked this chart)…

Simple yet powerful, right?

How to trade with the trend using Bollinger bands

Here’s the deal:

You know the middle line of the Bollinger Bands is simply a 20-period moving average (otherwise known as the mean of the Bollinger Bands).

And in strong trending markets, the 20-period moving average can act as an “area of value”.

This means when the market pullback towards the 20 MA, it’s an opportunity for you to get long (or short).

An example: The price bouncing off the 20-period moving average and it offers shorting opportunities…

Here’s another example:

Pro Tip: If you want to ride the trend, you can trail your stop-loss using the 20 MA, or the outer Bollinger Bands.

The Bollinger Bands and RSI Combo (a little-known technique)

Here’s the thing:

The Bollinger Bands indicator is great for identifying areas of value on your chart.

But the problem is… it doesn’t tell you the strength or weakness behind the move.

For example: How do you tell if the market will continue to trade outside of the outer bands or mean revert?

That’s where the Relative Strength Index (RSI) indicator comes into play.

And what you’re looking for is a divergence on the RSI indicator.

You’re probably wondering:

“What is an RSI divergence?”

Well, it can go 2 ways…

1. A bearish divergence is when the market makes a higher high, but the RSI indicator shows a lower high (a sign of weakness)
2. A bullish divergence means is when the market makes a lower low, but the RSI indicator shows a higher low (a sign of strength)

So, now the question is…

“How do you combine RSI divergence with Bollinger Bands?”

Here’s how:

If the price is at upper Bollinger Bands, then you can look for a bearish RSI divergence to indicate weakness in the underlying move.

Or…

If the price is at lower Bollinger Bands, then you can look for bullish RSI divergence to indicate strength in the underlying move.

Here’s an example:

Pro Tip: You can combine this technique with Support and Resistance to find high probability reversal trades and improve your Bollinger Bands strategy.

The Rubber Band effect: How to use Bollinger Bands and “predict” market reversal

Now:

You can think of Bollinger Bands like a rubber band.

Whenever the price gets too far away from it, it tends to mean revert back towards the middle band.

You’re probably thinking…

“But how do you know when it’s about to snap back? Because the price can stay overstretched for a long time.”

You’re absolutely right.

That’s why you must also take into consideration Bollinger Bands, Support Resistance, and Candlestick patterns.

Here’s how it works…

(For long setups)

1. Look for strong momentum into Support
2. You want to see the candle close outside the lower Bollinger Bands (this tells you the market is overstretched)
3. If the next candle is a bullish reversal pattern (like Hammer, Bullish Engulfing, etc.), then the market is likely to reverse higher
4. And vice versa for short setups