4 Ways On How To Use Bollinger Bands To Trade-The 4th Is The Best

The bollinger band indicator was developed by a guy called John Bollinger in the 80’s and is without doubt one of the most popular indicators for swing trading in forex.

Bollinger band are generally used to measure the location of  price in relation to recent movements.

But there’s something else that makes bollinger bands special and that is:  it differs from most other forex indicators by taking volatility into consideration.

Remember, volatility is what makes you money in forex trading.

 

BOLLINGER BAND CALCULATION

Here’s how the bollinger band is calculated:

  • The Middle Bollinger Band is simple a 20-period Simple Moving Average = Average of Last 20 Closing Prices
  • The Upper Bollinger Band is calculated by adding 2 standard deviations to the Middle band = Middle Band + 2 x SD
  • The Lower Bollinger Band is calculated by subtracting 2 standard deviations from the Middle band = Middle Band – 2 x SD

If you don’t know what the standard deviation means then here is an explanation:

  • standard deviation is a statistical indicator that measures the average deviation of each number in a sample from the average number.
  • the higher the number, the more scattered the sample which means the higher the volatility of the currency pair.

So from knowing how the bollinger band is calculated, you can say that the more distant the upper and lower bollinger bands are from each other, the higher the volatility of the market.

The chart below shows and example of this:

How To Use Bollinger Bands To Trade

 

TRADING BOLLINGER BANDS

These are the 4 best ways on how to to trade with bollinger bands.

 

Method#1:  Trading The Dynamic Support And Resistance Of Bollinger Band Lines

You will notice that the upper and lower bands can be used as resistance and support levels respectively.

So when you see a price hit the upper and lower bands and reverse, it can lead to some big moves and you can use that as your trade signals.

See example chart below:

How To Trade With Bollinger Bands

Note: with the kind of trading system above, its best to trade in a trending market as the signals will be more reliable. Ranging and non tending markets will give  you problems with this.

For example, if the market is trending down, you must only look for sell trade when the price hits the upper bollinger band line and possibly confirm your entry with a bearish reversal candlestick pattern.

The opposite is also true…if the market is trending up, then only look for buy signals when price hits the lower bollinger band line.

 

Method#2: Trading the Fixed Horizontal Resistance And Support Lines In Conjunction With Bollinger Band Lines

This method is fairly simple. What you are looking for is a horizontal  support or resistance level which coincides with price touching the upper or lower bollinger band in this level.

It is also important to make sure that price has already reversed at least once on this support or resistance level which will allow it to  have significance thus making trading signals more reliable. See chart below for example:

How To Trade Using Bollinger Bands

 

Method#3: Trading The Breakouts Of Bollinger Bands

This is fairly simple…you just watch for price to break through the upper or lower bollinger band lines. Make sure the candlestick closes above the upper bollinger band line before you buy or close below the lower bollinger band line before you sell.

In a very strong trending market, this method will work perfectly.

But having said that, the signals produced from trading bollinger band breakouts like this are less reliable.

Why?

Because usually by the time you enter a sell or a buy trade, the market will reverse and you will get stopped out.

However, there’s a last trading method below that allows you to take breakouts of bollinger band lines  and the trades from this can give you very good profits…its called the bollinger band squeeze.

 

Method#4: Trading The Bollinger Band Squeeze

When you see price trapped or “squeezed” between the upper and lower bollinger band lines, it means that the market is a period of low volatility and its a matter of time before a breakout happens…either up or downward.

The bollinger band indicator allows you to see this squeeze and capitalize on the breakout that happens afterwards.

You can place pending 2 pending stop orders on both sides just outside the squeeze which will trigger when a breakout happens. Once one pending order is activated, cancel the other pending order.

Or you can place stop loss on the other size of the squeeze or halfway point between the squeeze.

Trading Bollinger Band Squeeze

Another way to trade the bollinger band squeeze is allow the breakout to happen and then wait for price to reverse to touch the middle bollinger band line and enter an order when price starts to head back in the breakout direction again.

In the chart above, notice that a breakout did happen when a red candlestick closed below the bollinger band squeeze but the next candled was bullish and price went up to touch the middle bollinger band line then once it touched it, price reversed all the way down…a big downward move.

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