Bollinger bands are among the most popular indicators among stock traders. They are sensitive to market volatility and can serve not only as support and resistance levels, but also as targets. Based on all these features of the indicator, Bollinger trading strategy… It can be used on a price chart with a time period from M1 to MN, which displays the quotes of any of the Forex market instruments, futures or stocks.
Buy signal for the Bollinger trading strategy
To use the TS, you must use two price charts:
- The first one displays your working time period;
- The second one displays a timeframe 3-5 times higher than your working one.
Accordingly, the Bollinger trading strategy can be used on a combination of the following timeframes: MN and W1; W1 and D1; D1 and H4; H4 and H1; H1 and M15; M15 and M5; M5 and M1.
The advisability of using the Bollinger trading strategy on charts below H1 depends on the size of the spread on the instrument you are trading. For a buy signal to appear on the Bollinger trading strategy on the price charts, the following conditions must be met:
- One of two things must happen on a price chart with a higher timeframe. The first is a pullback from the middle Bollinger band of one of the most common candlestick patterns (pin bar, engulfing, etc.). The second is the intersection of the middle band of the indicator with a close on the side opposite to the open price. Depending on the direction in which the intersection or rebound from the middle Bollinger band occurred, the direction of the trend for trading on the lower price chart is determined. This trend is considered valid until a trend change occurs, i.e. crossing the middle of the Bollinger Band in the opposite direction. At the same time, there is a condition: if, say, a candle crossing the middle of the Bollinger band touches the upper band, then you should not start looking for a buying trading signal on a lower timeframe.
- After the trend has been identified on the older chart, you can look for a signal for trading according to the Bollinger strategy in the lower timeframe. An immediate buy signal will be a pullback from the middle or lower band of the indicator.
You must enter the market by placing a Buy Stop order slightly above the maximum of the signal candlestick on a chart with a shorter time period.
Example of a buy signal
Sell signal for trading according to the Bollinger strategy
For a signal to sell according to the Bollinger strategy to appear on the price charts, the following conditions must be met:
- On the chart of the older period, the candle should open above the middle Bollinger band and close below it. Or a rebound from the middle of the indicator downwards should occur;
- After the appearance of a signal from the older period about the presence of a downtrend on the price chart of the younger period, a rebound from the upper or middle Bollinger band should appear.
As soon as the conditions of the trading strategy for the sell signal are met, it is necessary to place an order of the Sell Stop type below the minimum of the signal candle on a chart with a lower timeframe.
Example of a sell signal
Stop Loss and Take Profit in the Bollinger Trading Strategy
When buying, Stop Loss is set under the pullback price model of the lower timeframe, and in case of selling – above it (plus the spread). It is allowed to follow the position by moving the Stop Loss level behind the newly emerged local extremes. It is possible to move Stop Loss to breakeven using the Bollinger trading strategy only when the rules for position tracking are observed.
Take Profit in a trading strategy is determined by the older time period of the price chart. The Take Profit level when buying is the price value of the upper Bollinger band of the last closed candle. Until the price has reached the level of the upper band corresponding to the last closed candle, the Take Profit level should change, even if you are already in a position. But if the price reaches the Take Profit level in the older time period, and you have not entered the market using the strategy, then the buy signal is canceled. You need to wait for the next signal from a higher timeframe. The same goes for the case of selling, just the opposite.
Money Management in the Bollinger Trading Strategy
You should take risks in the trading process with an acceptable percentage of the deposit or lot – this is the main rule. If you feel that you are not comfortable in any way, then you should increase the time periods of the charts. Personally, I recommend risking the same percentage of the current fixed size of the deposit in each trade, this risk should not exceed 2%.
This trading strategy is good because there is no need to independently make a number of such important decisions as:
- Determination of the levels from which a rebound should be expected or by which the optimal Take Profit level should be determined;
- Determining the direction of the trend.
But since I do not have reliable statistical data on the effectiveness of the Bollinger trading system, I advise you to test it on historical data before using it. If you have never worked with an indicator used in a strategy, I recommend that you first bargain with it on a demo account in order to feel the nature of its behavior in action.