Bollinger Bands Bounce Trading Strategy

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Bollinger Bands Bounce Trading Strategy

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.

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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.

Conclusion

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!

Thanks for reading,

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Bollinger Bands Trading Strategy

Bollinger Bands are a technical analysis indicator that is developed by John Bollinger. It is useful for finding overbought/oversold areas and also helps traders to identify the market volatility. It is commonly used as a reversion to the mean indicator. It means that if the price is below the bands, the price is currently low and if the price is above the bands, it is interpreted as too high. During the high volatile market, Bollinger bands will widen and when there is low volatility, the bands contract.

When you apply Bollinger bands in your chart, you will see three lines. Lines are nothing but based on the concept of simple moving average.

The upper band – middle band + 2(standard deviation)

Lower band – Middle band – 2 (standard deviation)

Middle band – 20 period moving averages

Table of Contents

How to use Bollinger Bands?

Bollinger bands are popular technical analysis tools used by many traders .when the bands contract because of low volatility; it is called “squeeze’. This indicates upcoming bout of high volatility. t And if the bands expand, it can be interpreted as an upcoming period of low volatility.

Bollinger Band Squeeze

As we discussed, when the bands get close together as shown in the image –it is called a squeeze. Whenever traders find the squeeze, it is considered as a potential signal of an increase in volatility in the future and traders can get trading opportunities. This condition doesn’t give the trading signals.

Bollinger Bands helps traders to identify the volatility of the market, when you find squeeze in the bands, we can say that there is a low volatility environment in the market and huge move is expected after the breakout.

Breakouts

A breakout above or below the bands occurs when there is a major event. 90% of price action takes place between the two bands. The breakout is not a signal for trading. Most people make a mistake when they find the breakout, they believe that price breaking the bands or exceeding one band is signal for buy or sell. Breakouts don’t provide any clue for the direction of future price movement.

Bollinger Bands Trading Strategy

1. How to Buy at Bottom and Sell at Top

If you want to become profitable in the market, just buy at the bottom and sell high. You can easily follow this buy at low and sell at top rule with the help of Bollinger Bands.

The upper and lower bands are 2 standard deviations from the middle line (mean). It means that if the price is touching the upper band, it is considered as the “expensive” and if the price is near the lower band, it is considered as “cheap”.

If you want to get a higher probability of winning trades, you need to follow a few steps.

  • Check the price is in an uptrend so the lower band is also in an uptrend. (Vice Versa)
  • Now look for the reversal candlestick pattern i.e. inverted hammer at the top, hammer at the bottom, etc. That gives the reversal signal.
  • Here, the outer bands act as support and resistance.

2. Bollinger Bands and RSI

Bollinger Bands Indicator is useful for identifying the area of value on the chart, but it doesn’t provide the strength or weakness of the price move. So, here RSI plays an important role in this strategy.

Here, we will use divergence in RSI with Bollinger bands. Know more about Divergence.

For, buying opportunity: When the price is at lower Bollinger band and making bullish divergence with RSI (It provides the strength in the underlying move)

For selling opportunity: If the price it at upper Bollinger bands and makes bearish divergence with RSI (Again, it indicates the strength in underlying trend)

Pros

  • Bollinger bands are useful to identify when the market is expensive or cheap. This indicator is very user-friendly and can provide traders another dimension for chart analysis.

Cons

Bollinger band is a lagging indicator so it cannot predict the price patterns, but they follow the current market movements.

This indicator indicates the overbought and oversold, conditions, but when the buying or selling pressure continues, Bollinger Bands don’t provide any signals so we cannot predict when buying or selling pressure will come to an end.

Note: We provide free stock market education through this website. Before using the strategies mentioned here, do back test by yourself. We are not responsible for any profit or loss made with our strategies.

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.

13# Bollinger Bands Bounce Trading System

Submit by Joy22

This system works on any charts; I prefer using it on 4H and 1H charts.
Be sure to backtest it before you try it on any other time frame.

Indicators
Bollinger(20)

Entry Rules
Entry is made after price bounces from Bollinger’s Moving Average, when the Moving Average is trending (pointing up or down).
After price has bounced from MA (Created a bullish candle for long trades or bearish for short), place stop order 1 pip above the candle (for long) or below the candle (for short). Watch examples for clarifications.

Stop Loss is 1 pip below low of the previous bar (for long trades), and 1 pip above high of previous bar + spread (for short trades).

Trailing Stop
This is what this system is all about.
Stop Loss is trailed to 1 pip below lowest low of last 4 bars (for long trades) and to 1 pip above highest high of last 4 bars (for short trades). Exits are done only by the trailing stop

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