In this article, you will find how to use Bollinger bands in day trading. This strategy uses two of the most popular trading indicators on the market, Bollinger Bands and RSI. They are used to simply find a price “bounce” that occurs during the main trend.
If you have been looking for Bollinger band trading strategies that work, you are going to want to pay special attention.
This special strategy teaches you how to read Bollinger Bands and Bollinger Band signals. You'll also learn about Bollinger Bands squeeze, double Bollinger bands strategy, Bollinger Bands secrets, and more. We also have training for the ADX Indicator.
Something that will look like this:
How To Use The Bollinger Band Indicator
Bollinger Bands are well known in the trading community. You can get a great Bollinger band formula with a simple trading strategy.
They were created by John Bollinger in the early 1980s. The purpose of these bands is to give you a relative definition of high and low. So in theory, the prices are high at the upper band and then are low at the lower band. Bollinger Bands include three different lines. The upper, middle, and lower band. The middle band basically serves as a base for both the upper and lower.
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.
The spacing between the lower, upper, and middle band is determined by volatility. The middle band consists of a 20 period moving average. The upper and lower are two standard deviations below and above the moving average in the middle. Standard deviation is a statistical measure that offers a great reflection of the price volatility.
When you see the band widen that simply means that there is volatility at that time. When the price moves very little, the band will narrow which means that there is little volatility.
I prefer to use this trading strategy using the 1 hour or 4 hour time chart. You can adjust according to what style of trader you are. But the example I will show you will use the 4 hour and 1 hour time chart.
Before we start looking at the rules of the strategy, let’s take a look at Bollinger bands. Let's see what they will look like on a chart if you have never used this type of indicator in the past:
After examining the picture, it may seem wise to buy every time the price hits the lower band. Or, on the other hand, sell every time the price hits the upper band. This can technically work but is a risky way of trading using the Bollinger Bands. Sometimes strong trends will ride these bands and end up stopping out many unfortunate traders who used that method. This is why we are using the RSI indicator to help confirm and trade the “bounce” of an upper or a lower band. Also, read about how bankers trade in the forex market.
The RSI indicator is used in this strategy to see how the currency is weakening or strengthening. (Tap here for another RSI trading strategy article).
These indicators should come standard on your trading platform. There is no need to adjust these, as we will use the default settings. Here you can learn on How to fade the momentum in Forex Trading.
I would suggest drawing a horizontal line on the 50.00 level in the RSI indicator before starting. You will find out exactly why soon.
Trading Indicators Used with the Bollinger Bands Bounce Trading Strategy:
- Bollinger Bands (20, 2)
- RSI (Relative Strength Index) Indicator (14)
How to Buy Low and Sell High
In theory, Bollinger Bands will contain all trading activity that occurs within 2 standard deviations of the expected norm (the trend line).
This means that about 90-95% of price movements will occur within this range.
Bollinger Band traders are looking for instances of resistance and support. Instances of support occur when the demand has become “concentrated” and a downward trend is likely to lose momentum. On the other hand, instances of resistance occur when an upward trend is “condensed” and will likely reverse downward in the near future.
Bollinger Bands make it easy to buy low and sell high. Traders will open a position when the trend line is nearing the bottom of the Bollinger Band range. Traders will need to close a position when the trend line reaches the top of the range.
Rules for Bollinger Band Bounce Trading Strategy
*To make it simple, I am going to use the same (GBPUSD 4-hour chart) example for each of these rules. This trade would have been a “BUY” trade. The rules are the same concept only the exact opposite for a SELL trade. The currency is in an uptrend and then it will pull back to the lower Bollinger Band. From there, if it follows the rules, we will execute a trade.
Rule #1: Find a currency that is in an Uptrend/Downtrend.
Finding a trending market is very simple. You can use price channels, trend lines, Fibonacci lines, to determine a trend. Find higher highs or lower lows and place a trend line on them. If the line is going up, it is an uptrend, if it's going down, it is a downtrend. It needs to be trending up or down, not a sideways trend.
Rule #2: The currency must fall back (from the uptrend) and touch, or almost touches, the bottom band.
When I say “Almost touches” an example would be something like this
**Bollinger Band trading tips: If it is any more than 5 pips away then I would not consider this validated, and I would wait for it to come closer to the bottom/top band.
As you can see in the example that price came all the way back down, from the uptrend, and touched the bottom band.
Once the price touches the bottom or top band, look a the RSI indicator for confirmation.
Rule #3: Once the Price hits the lower Bollinger Band, look at the RSI indicator and it should be between 30-50 and be rising.
The price hit the Bollinger Band, the RSI (when the price touches the bottom band) needs to be in between 50 and 30. If it is not here, and let’s just say it was at the 80 mark, then you wouldn't be interested in trade.
You want to see the RSI go up, in this case, in the direction of the trade. Remember that it should be in between the 30-50 mark. (In a sell trade the RSI would need to be in between the 50-70 mark and going downward.)
Once you see this movement you go ahead and look for an entry.
Rule #4: After price hits the lower Bollinger Band, and RSI is going upwards, make an entry when...
You can make an entry when you see a STRONG BULLISH candle to the upside, consecutive reversal candles to the upside, or you find a bullish pattern forming. You need to see that the trend is moving upwards, in this case, before you enter a trade.
If the candlesticks are moving to a point where it is making a new low, this would not be a good time to enter a trade. However, once the candles fail to make a new a low watch to see if it forms a bullish formation. Here is an example of a master candle setup.
In this example, I bumped down to a one hour chart to make an entry. This is perfectly fine to do. This could give you a more accurate place to make an entry point. As I said, the 4 hour and 1-minute time frames are the preferred time frames for this strategy. Yes, there is less of an opportunity for a trade, but the signals are very strong when you are in a higher time frame.
Rule #5: Stop Loss / Take Profit Target
Always remember to be placing a stop loss, and having a good target area. With this strategy, we recommend using a 30-50 pip stop.
Your take profit can be when the price touches the other Bollinger Bands.
The Bollinger Bands are a great indicator to use in any market. When you combine these with the RSI indicator, it should give you great entry points. Here is another strategy called trading volume in Forex.
Something else you can consider is when the price touches the middle band. You can make a second entry to press your winners. This can potentially give you double the profit. With this strategy, we only use the one trade that we initially make. But if your rules allow you to make multiple trades at a time with the same currency pair, then you may consider adding a second position at the middle line.
Tap here to read another great trading strategy! This one requires no indicators, just pure price action!
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