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INTERMEDIATE

Bollinger Bands Strategy

Master volatility-based trading with Bollinger Bands - identify overbought/oversold conditions and breakouts

Difficulty

Intermediate

Risk Level

Medium-High

Best For

Ranging Markets

Key Concept

Volatility

What are Bollinger Bands?

Bollinger Bands are volatility indicators that consist of three lines: a middle band (SMA) and two outer bands that are standard deviations away from the middle band. The bands expand during volatile periods and contract during calm periods, providing insights into price volatility and potential reversal points.

Upper Band = SMA(20) + (Standard Deviation × 2)
Middle Band = SMA(20)
Lower Band = SMA(20) - (Standard Deviation × 2)
Bandwidth = (Upper - Lower) / Middle

Bollinger Band Components

Upper Band

Resistance level, overbought signals

SELL Signals

Middle Band

20-period SMA, trend indicator

TREND Filter

Lower Band

Support level, oversold signals

BUY Signals

Trading Rules

BUY Signals

  1. 1.Price touches or goes below the lower Bollinger Band
  2. 2.Look for bullish reversal candlestick patterns
  3. 3.Wait for price to bounce back towards the middle band
  4. 4.Enter long with stop loss below the lower band

SELL Signals

  1. 1.Price touches or goes above the upper Bollinger Band
  2. 2.Look for bearish reversal candlestick patterns
  3. 3.Wait for price to fall back towards the middle band
  4. 4.Enter short with stop loss above the upper band

Bollinger Band Squeeze

The Squeeze Setup

What is a Squeeze?

  • ✓ Bands contract to their narrowest point
  • ✓ Low volatility period
  • ✓ Bandwidth reaches minimum values
  • ✓ Anticipates major price movement

Trading the Squeeze

  • ✓ Wait for bands to expand
  • ✓ Trade in direction of initial breakout
  • ✓ High volume confirms breakout
  • ✓ Target opposite band for profit

Advantages & Disadvantages

Advantages

✓Adapts to changing volatility
✓Works in all market conditions
✓Clear overbought/oversold signals
✓Identifies potential breakouts
✓Combines trend and mean reversion

Disadvantages

✗Can give false signals in strong trends
✗Lagging indicator (uses historical data)
✗Requires parameter tuning
✗May not work in low volatility
✗Complex for beginners

Risk Management

1.

Stop Loss

Place outside the bands (above upper for longs, below lower for shorts)

2.

Take Profit

Target opposite band or middle band for partial profits

3.

Position Size

Reduce size during high volatility (wide bands)

4.

Confirmation

Use volume and candlestick patterns for confirmation

Disclaimer

Bollinger Bands are powerful but not infallible. They work best in ranging markets and can give false signals during strong trends. Always combine with other indicators and use proper risk management. The bands are calculated using historical data and may not predict future price movements accurately.