The strategy involves buying when the price of an asset falls below the lower Bollinger Band and selling when it rises above the upper Bollinger Band. In this article, you will learn how to use the Bollinger Bands bounce trading strategy in day trading. This strategy uses two of the most popular trading indicators on the market, Bollinger Bands and RSI.
Buying on the break of the lower Bollinger Band® is a simple strategy that often works. In every scenario, the break of the lower band was in oversold territory. Stocks that break the lower Bollinger Band® and enter oversold territory face heavy selling pressure.
The Bollinger Bands Trading Strategy Guide
If one band is pointing in one direction (i.e. up) the other band must point in the opposite direction (i.e. down) to confirm a swing trading opportunity. As a general rule, one of the basic principles of price action states that low ranges are always followed by large price ranges. The use of Bollinger Bands varies among traders depending on the trading style implemented. In conclusion, it is important to note that Bollinger Bands are just one part of trading. A trader needs to put into consideration a number of issues such as the overall market environment.
- Traders will open a position when the trend line is nearing the bottom of the Bollinger Band range.
- Bollinger Bands is a significantly different indicator to a VWAP.
- Bollinger Bands, a technical indicator developed by John Bollinger, are used to measure a market’s volatility and identify “overbought” or “oversold” conditions.
- This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day.
Or you can also use it to trade market reversals after the Bollinger Bands expand, which shows the increase in volatility of the market. If the price comes to a key market structure like support resistance and then forms a price rejection, that’s a possible opportunity for you to take a reversal trade. An accumulation stage is a range market within a downtrend, where you can identify resistance and support as price swings up and down within the accumulation. If you want to identify even more overstretch market conditions, you can increase the standard deviation to 3 or more. If you’re a new trader, it can be difficult to identify the volatility of the markets. Because in trending markets, the market can remain “cheap” or “expensive” for a long period of time.
Intro — Bollinger Bands Strategy
I prefer to use this trading strategy using the 1-hour or 4-hour time chart. But the example I will show you will use the 4-hour and 1-hour time chart. They are mainly used when determining when there are overbought or oversold levels. Selling when the price touches the upper band and buying when the price touches the lower band. Another strategy for using Bollinger Bands is to identify breakouts. A breakout is a period where the price of an asset suddenly moves in either direction after a period of consolidation.
- Just like in trading, certain technical indicators are best used for particular environments or situations.
- To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend.
- When the price is in the sell zone, it is a signal to go short.
- For instance, if the asset price falls ‘too much’, it will tend to revert to a ‘normal’ price.
Another strategy of using Bollinger Bands is in trend following. This is a strategy that involves buying when other traders are buying and selling when others are selling (basically, you will follow the crowd). It involves jumping into the bandwagon of an already-existing trend.
Bollinger Bands Strategy For Swing Trading
To assist traders on their trading journey, AvaTrade offers access to a free demo trading account. A demo account enables a trader to test the trading platform and the available indicators and tools without the risk of losing any money. This is the ideal environment to test Bollinger Bands and how they can effectively be added to your trading strategy.
Below is an example of how this strategy works under ideal conditions. One technical indicator is not better than the other; it is a personal choice based on which works best for the strategies being employed. Bollinger Bands® and Keltner Channels are different, but similar, indicators.
Using BB in trend following
The narrow bands are just closer to the price and thus likely to be touched. When price action is close to the upper band, the current price of the instrument is considered high relative to recent prices. If they cross the upper band, traders consider the instrument to be overbought. The Bollinger Bands Bounce trading strategy is a technique that uses the Bollinger Bands indicator to identify potential trading opportunities.