Next, I would rank futures because again you can begin to master the movement of a particular contract.
Therefore, this looks like the better option to exit this trade. This way you are protected against weekend risk and big gaps with the Monday opening. In this example, if you decided to wait, you would have fell victim to a 30 pips bearish gap. In this trading strategy we will approach situations when the price goes beyond the upper or the lower Bollinger Band.
At the same time, the bands should be expanding, which indicates higher volatility. Furthermore, we will include the Volume Indicator in order to enter trades only if volumes are high, or currently increasing with the direction of the trend. If all these requirements are met, you can open a trade in the direction of the breakout.
This tactic allows you to take advantage of rapid price moves caused by high trading volumes and high volatility. You should stay in these types of trades until the price breaks the period Bollinger Bands Moving Average in the opposite direction. Let me now show you how this Bollinger Band trading system works. The image illustrates a short trade opportunity based on signals from the Bollinger Bands indicator and the Volume Indicator.
However, the two Bollinger Bands are very tight and the volumes are relatively low. Therefore, we would stay out of the market for the time being. Suddenly, the two bands start expanding which is shown by the pink lines on the image. For this reason, we consider this as a nice opportunity for a short position in the Yen. You should always use a stop loss on this trade, and it should be located above the period Simple Moving Average.
This would act as a trailing stop, which means that you would constantly adjust the stop in the bearish direction. According to our strategy, we should stay in the trade as long as the price is below the period SMA. The range continues towards the period Simple Moving Average, which gets broken upwards on April Based on the rules of the strategy, this would be the exit signal and the trade should be closed out at this point. In my opinion, the better Bollinger Bands trading strategy is the second setup I showed you.
The reason for this is that Volatility and Volumes are mutually connected. Therefore, their importance to each other is essential, which in turn, creates reliable signals for trading. When the price is moving strongly beyond one of the bands during high volatility and high trading volumes, then we are likely to see a big price move on the horizon.
In addition, the rules for entering and exiting a trade and clear and straight forward, which makes this Bollinger Bands strategy easy to implement. The Bollinger Bands with candlestick patterns is a well-regarded strategy as well. However, it is less likely to produce a big price move. Some traders prefer this type of trade setup, which is quite fine, so long as the trader understands that this is more of a mean reversion strategy and requires stricter risk management controls.
We have learned quite a bit about Bollinger Bands in this lesson. Below you will find an Infographic listing 15 Important Things that you should know about Bollinger Bands. Download the short printable PDF version summarizing the key points of this lesson…. Click Here to Download. Click Here to Join. What you just saw was a classic Bollinger Bounce. The reason these bounces occur is because Bollinger bands act like dynamic support and resistance levels.
The longer the time frame you are in, the stronger these bands tend to be. Many traders have developed systems that thrive on these bounces and this strategy is best used when the market is ranging and there is no clear trend. When the bands squeeze together, it usually means that a breakout is getting ready to happen. Looking at the chart above, you can see the bands squeezing together.
The price has just started to break out of the top band. Based on this information, where do you think the price will go? Let's unpack this a little further. Do you realize that these gains were largely made over 3 days' worth of trading? I am getting a little older now and hopefully a little wiser and that kind of money that fast, I have learned is almost impossible for me 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? I indicated on the chart where bitcoin closed outside of the bands as a possible turning point for both the rally and the selloff. But let's be honest here, this is a minute chart of a highly volatile security. You must honestly ask yourself will you 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. I honestly find it hard to determine when bitcoin is going to take a turn looking at the bands. 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 for error. I personally do not trade bitcoin, but after looking at the most recent price swing using bands a couple of things come to mind:. Pairing the Bollinger Band width indicator with Bollinger Bands is like combining the perfect red wine and meat combo you can find. In the previous section, we talked about staying away from changing the settings.
Well, if you really 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 to the moving average to gauge the volatility of a stock. Well, now 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.
Still, don't believe me? Look at the below screenshot using both the Bollinger Bands and Bollinger Band width. Notice how the Bollinger Band width tested the. 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. 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 just another example of why it's important to pair Bollinger Bands with other indicators and not use it as a standalone tool. The above chart is of the E-Mini Futures. 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. 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? Now that I have built up tremendous anticipation, let's see if there is a way to identify an edge. Remember in Chapter 4, the Bollinger Band width can give an early indication of a pending move as volatility increases. In the above example, the volatility of the E-Mini had two breakouts prior to price peaking. If that wasn't enough to convince you, then the second break above the 8-month swing high of the Bollinger Band width was your second sign.
After these early indications, the price went on to make a sharp move lower and the Bollinger Band width value spiked. 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.
Does anything jump out that would lead you to believe an expanse in volatility is likely to occur? Let me tell you, when you are trading in real-time, the last thing you want to do is come late to a party. More times than not, you will be the one left on cleanup after everyone else has had their fun.
It was very subtle, but you can see how the bands were coiling tighter and tighter from September through December. 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 the candles were red and 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.
Now, one could argue that this wasn't enough information to make a trading decision. That is 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 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 spring break.
This gives you an idea of what topics related to bands are important to other traders according to Google. Why is this important? It's safe to say bands is probably one of the most popular technical indicators in any trading platform. If memory serves me correctly, Bollinger Bands, moving averages and volume were likely my first taste of the life. Well as of today, I no longer use bands in my trading.
That doesn't mean they can't work for you, but my trading style requires me to use a clean chart. Therefore, the more signals on the chart, the more likely I am to act in response to said signal. This is where the bands expose my trading flaw. For example, if a stock explodes above the bands, what do you think is running through my mind? You guessed right, sell! The stock could just be starting its glorious move to the heavens, but I am unable to mentally handle the move because all I can think about is the stock needs to come back inside of the bands.
Instead of taking the time to practice, I was determined to turn a profit immediately and was testing out different ideas. I decided to scalp trade. I would sell every time the price hit the top bands and buy when it hit the lower band. It's really bad, I know. From what I remember, I tried this technique for about a week, and at the end of this test, I had made Tradestation rich with commissions. The key flaw in my approach is that I did not combine bands with any other indicator.
This left me putting on so many trades that at the end day, my head was spinning. Flashback to , when I was just starting out in day trading; I had no idea what I was doing. One of the first indicators I put to the test was Bollinger Bands. It's one of the most popular indicators. Al Hill Click to tweet. At the end of the day, bands are a means for measuring volatility. So, it's not something you can just pick up and use for buy and sell signals. Just as you need to learn specific price patterns, you also need to find out how bands respond to certain price movements.
This level of mastery only comes from placing hundreds, if not thousands of trades in the same market. The thing that surprised me is that I couldn't find many other famous authors or experts in the space. I'm not sure if this is because there aren't many people interested or if other traders stay out of the bands arena because John is so actively evangelizing the bands. The books I did find were written by unknown authors and honestly, have less material than what I have composed in this article.
The other hint that made me think these authors were not legit, is their lack of the registered trademark symbol after the Bollinger Bands title, which is required by John for anything published related to Bollinger Bands.