The bollinger bands strategy with 20 period moving average is almost similar to the other two bollinger band trading strategies listed below(you can click the links to check them out).
THE SETTINGS OF THE BOLLINGER BAND
Here are the settings of the bollinger band:
- 2 standard deviation
- the period should be set to 20 (you can also try 14 period as well)
THE TRADE ENTRY RULES OF THE BOLLINGER BANDS STRATEGY WITH 20 PERIOD
Before we get into the rules of the bollinger bands forex trading strategy here are some things that you need to know about this trading system:
- if price is moving below the 20 period (the middle line) then the market is in a downtrend.
- if price is moving above the 20 period , consider the market is in an uptrend.
- price has to come and touch the middle bollinger band line(the 20 period) for any trade to be initiated.
- the upper bollinger band line or the lower bollinger band lines can be use for take profit (as soon as price touches it, exit…this is one option for taking profit on your trades)
When to Sell:
- The market is in a downtrend and then price rises up to touch the middle bollinger band line.
- As soon as this middle line is touched, place a sell stop order about 3-5 pips under the low of the candlestick that touched it.
- Or you can wait to see if a bearish reversal candlestick is formed first before you place your sell stop order.
- The sell stop order must be place only after this candlestick closes.
- Place your stop loss anywhere form 5-10 pips(or more) above the high of the candlestick.
- When to take profit or exit a trade- a few options you can use:
- when price goes back down and touches the lower bollinger band line (you exit your sell(short) trade)
- or set your take profit level equal to the distance the price traveled in pips during that upswing to touch the middle bollinger band line(see the blue dotted line below in the chart). So you use that difference in pip movement and calculate at what price level below you need to place your take profit target.
- or you can also use the previous swing low(bottom) as your take profit target level.
I hope this chart here makes things a little bit more clearer for you:
When To Buy:
For buying you have to do the opposite of the selling (short) trade rules. Its very easy:
- place your buy stop order 3-5 pips above the high of the candlestick that touches the middle bolling band line.
- place you stop loss 5-10 pips or move below the low of this candlestick.
- then set you take profit targets as described above in the sell rules but in the opposite.
ADVANTAGES OF THE BOLLINGER BANDS TRADING STRATEGY WITH 20 PERIOD
- low risk trade entries (small stop losses)with good risk:reward ratio
- with can make big profits easily when you trade in larger timeframes like the 4hr or the daily
- using price action(bullish or reversal candlesticks) to confirm your entry increases your odds of a trade being profitable.
- in a nice trending market, this system works really well.
DISADVANTAGES OF THE BOLLINGER BANDS STRATEGY WITH 20 PERIOD
Like all trading systems and strategies, they have faults or weaknesses when market behaves somewhat different to the conditions they were designed to perform well in. The main disadvantage of the bollinger bands strategy with 20 period is that in a non trending market, this trading system will perform poorly.
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