A very important advise. If so, you have a long trade setup buy signal. September 13, at 2: We need to have an edge when trading a bollinger band squeeze because these setups can head-fake the best of us. Zone 3 is the most important part of the below chart. As you see at 7 and when it wants to break above the Keen to give it a go.
Bollinger Bands. Bollinger Bands, a chart indicator developed by John Bollinger, are used to measure a market’s volatility. John Bollinger. Basically, this little tool tells us whether the market is quiet or whether the market is LOUD! When the market is quiet, the bands contract and when the market is LOUD, the bands expand.
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.
Conversely, when I search on Elliott Wave, I find a host of books and studies both on the web and in the Amazon store. I am still unsure what this means exactly. With there being millions of retail traders in the world, I have to believe there are a few that are crushing the market using Bollinger Bands. I just struggled to find any real thought leaders outside of John.
I write this not to discredit or credit trading with bands, just to inform you of how bands are perceived in the trading community.
Bollinger Bands work well on all time frames. Remember, price action performs the same, just the size of the moves are different. Without a doubt, the best market for Bollinger Bands is Forex. Currencies tend to move in a methodical fashion allowing you to measure the bands and size up the trade effectively. Next, I would rank futures because again you can begin to master the movement of a particular contract.
Last on the list would be equities. The captain obvious reason for this one is due to the unlimited trading opportunities you have at your fingertips.
It's one thing to know how the E-mini contract will respond to the lower band in a five-day trading range. It's another thing to size up one stock from another in terms of how it will respond to the bands. I hope you have enjoyed reading this article. 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.
Always remember to be placing a stop loss, and having a good target area. With this strategy, we recommend using a pip stop. 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 adding a second position at the middle line may be something you would want to consider. Tap here to read another great trading strategy! This one requires no indicators, just pure price action! Please leave a comment below if you have any questions about Bollinger Bands Bounce Strategy!
Grab the Free PDF Strategy Report that includes other helpful information like more details, more chart images, and many other examples of this strategy in action! Please Share this Strategy Below and keep it for your own personal use! Something that will look like this: How to use Bollinger band indicator Bollinger Bands are well known in the trading community.
Tap here for another RSI trading strategy article These indicators should come standard on your trading platform. The currency must fall back from the uptrend and touch, or almost touches, the bottom band. Once the price touches the bottom or top band, look a the RSI indicator for confirmation.
Once the Price hits the lower Bollinger band, look at the RSI indicator and it should be between and be rising.
Once you see this movement you go ahead and look for an entry. Your take profit can be when the price touches the other Bollinger bands. Conclusion The Bollinger bands are a great indicator to use in any market. As you see the support and resistance of the range are shown much better in the line chart blue circles. Numbers 1, 2 and 3 are where the candlesticks 1, 2 and 3 formed on the previous chart.
In the above line chart, the range breakout is confirmed while candlestick 3 was forming because the price line goes up, touches and rides the Bollinger Upper Band. This means the price has broken above the range, and now we have an uptrend. So we learned that the close price is very important when we work with Bollinger Bands. Like the Fibonacci system , one of the ways of trading using the Bollinger Bands, is finding a range and then waiting for its breakout.
Bollinger Bands are really good in following the trends. Please follow the numbers on the below chart. If I wanted to take a long position I would wait for more confirmation which is the 2 candlestick. I would go long at the close of 2 candlestick.
It is another confirmation for the beginning of an uptrend. Zone 3 is the most important part of the below chart. Conservative traders prefer to take their long positions after the formation of such a confirmation.
They go long when the price breaks above the thin red line 4. They place the stop loss below the low of the last candlestick that its shadow is broken down the Bollinger Middle Band.
As you see it goes up strongly first red big arrow. There are some small red candlesticks but they should not be considered as reversal signals. At 5, the price goes down to retest the Bollinger Middle Band. This is the beginning of the second Elliott Wave. It is where some traders wait for the retrace continuation to go long.
When you see the price has been going up strongly for such a long time, you should ignore the first and even the second reversal signal.
They are not reversals. They are continuation signals in fact. I mean you have to consider them as continuation signals not reversals. So the price goes down, retests the Bollinger Middle Band, and it even succeeds to break below the middle band, but keeps on going up again.
Fibonacci can be a big help here. As you see at 7 and when it wants to break above the We should now expect it to break above the As you see it could even reach the It is the same as when we have a downtrend. Candlesticks touch and ride the Bollinger Lower Band. Bollinger Bands are great in showing the reversal signals too. Usually a nice reversal signal becomes formed when a candlestick breaks out of the Bollinger Upper or Lower Bands, and then it is followed by another candle which has a different color the confirmation candlestick.
One of the best examples can be seen in the above image at 1. Below, I am showing you the signal once again:. As you see the candlestick 1 which is a bearish candlestick is formed completely out of Bollinger Lower Band, and the next candlestick 2 which is a bullish candlestick has covered the body and upper shadow and also most of the lower shadow of candlestick 1.
These two candlesticks form a signal which is called Bullish Engulfing. It is a strong short reversal signal when it breaks out of Bollinger Upper Band. I strongly recommend you to learn the candlestick signals. Note how both candlesticks broken out of the Bollinger Lower Band and how the second candlestick has covered the first one totally.
Note how both candlesticks have broken above of the Bollinger Upper Band and how the second candlestick has covered the first one. Also look at the big upper shadow that the second candlestick has formed. False signals always form. Indeed, the form a lot more than the true signal. True signals are easier to catch, because they are stronger and look outstanding. There are false range breakouts and also false reversal signals.
Those who like to trade the reversal signals, will be encountered with more false signals because a trend can be continued for a long time, and it is not easy to say when it will reverse. If you like to avoid being trapped by false reversal signals just ignore the very first two reversal signals when there is a strong trend ongoing. For example, some traders take a short position when they see the below signal, but as you see this is not a strong signal compared to the signals I showed you above:.
The uptrend is really strong, and this signal is the very first reversal signal on such a strong uptrend. What do I mean by strong uptrend? Look at the uptrend slope. It is a sharp slope that is going up strongly. There is no sign of exhaustion in it yet. Look at the Bollinger Middle Band Slope the first red arrow. So the trend is still strong and has not formed any sign of exhaustion when this relatively true signal was formed.
You could take a short position, but you really had to get out when the continuation signal formed around Bollinger Middle Band. Now look at the below chart and follow the numbers. Find out why some signals are false, some are true and some are continuation. As you see Bollinger Middle Band works very well with the continuation signals when there is an ongoing strong trend.
In an uptrend, continuation signals are formed when the candlesticks go down, retest Bollinger Middle Band, and then go up again. Taking the continuation signals are much safer than the reversals, unless you make sure that the trend is really close to reverse and is already exhausted. This was just an introduction how to use Bollinger Bands in taking the reversal and continuation trade setups on the trending and sideways markets.
You need to practice more to become expert in locating the true signals. Learn more about Bollinger Bands:. I have studied this most effective indicator explanation and got photo copy for ready reference.
Indicator has been explained in very clear manner. I will use this strategy in my trade. Thanks a much for such demonstration. Great man…I have never seen such a great explanation even upon paying tuition fees. U r really Excellent. I am looking forward article from you regarding candlestick reversal signals and false signals….
I am learning from your article and that would be really helpful for all of us basically for me. So, thanks again and please try to help us to get more skilled with the other ways to do better in trading. From the start i was stick with the BB indicator but not use it with details.
This could help me better in BB. The break away gap in the last graph at 7 which was tagged relatively true reversal signal is also a confirmation of change in polarity. This occurred just after the bearish engulfing pattern at 7. My question is does break away gap join in fundamental analysis of a trend in such suitation? Thank you so much. The fact that you explain everything so clearly is amazing. The fact that you also involve real life examples of stocks and having us do questions helped the info sink in even more!
The above article is clear to understand. Mainly, because they are in the Middle Band region and since it is in Middle Band, it could be retesting the Middle Band or breaking away from the Middle Band, how can a novice trader consider continuation and confirmation as a trade setup?
I know we can consider the close price to determine the direction. But, going back on some charts and seeing such signals — it proves to be quite a tricky setup with chance. We have talked about the candlesticks that need confirmation in different articles:. Also this article talks about the continuation trade setups in more details: Hey Chris my confidence in trading confidently increases by every article of yours I read even without paying a dime More grease to your elbow and more assets in your arsenal,you did quite well and God will bless all your pips Thanks.
I am new trader and start trading right now. Explain in a very simple and more efective ways. Chris Pottorff for a such a nice article which specially very helpful for New trader…. Which one should I choose to have exactly the Bollinger Bands you are using to trade?
What time frame is suitable? Here is the answer about time frame: Are you new to Rezze? Then please read this article first: You know I have got it, when I ask less questions. But at the moment, like a sponge I am absorbing your materials. And they are all good and consistent.
Referring to point 2 above on reversals. Does it matter to the strength of the setup if in the piercing line above, the upper shadow is also very long. What if both candles with beautiful size and long shadows were out of the BB range, and none made back or crossing into the BB range?
What do you make out of the strength of such a setup? Do you wait for another confirmation? Yes, it is a negative point for a long trade setup: What if the candlestick preceeding 1 was also outside the BB range?
Say it went bearish body and shadows under the lower BB, and candlestick 1went up bullish strongly but still outside the lower BB? Would it have been a good setup? Is this a strong trade setup? What would you score it? Yes, it a score trade setup that we took it and we use it to compare the other short trade setups with: I suggest you to read all the articles listed on the below post carefully and patiently.
What I understand from the number of questions you ask while you have not read the articles carefully, is that you are excited and in a hurry. This is not good for a trader: Thank you for your wisdom. I really appreciate your helpful attitude and being extremely patient with me. You are right that I am excited and in a hurry to understand it. I too have lost a lot of money, and we are not talking about just tens of thousands.
In fact, I had decided to not trade again but to just invest using value investing. But I still got burnt on good companies because of there are just too many variables, e. Hence, I find currencies are much purer.
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Another Forex trading strategy to work around this is to add a second set of Bollinger Bands placed only one standard deviation from the moving average, creating upper and lower channels. Then, buy orders are placed within the lower zone and sell orders in the upper zone, increasing execution probability. Bollinger Bands® is the second important indicator I use along with candlesticks. In fact, the combination of candlesticks and Bollinger Bands creates the strong trade setups I look for. Bollinger Bands is a unique indicator with some awesome features that cannot be found in the other indicators. Bollinger Bands are a powerful technical indicator created by John Bollinger. Some traders will swear trading a Bollinger Bands strategy is key to their success (if you meet people like this be wary). There are no holy grails or free lunches in the business of trading). The bands encapsulate the price movement of a stock.