There are many strategies to trade the Bollinger Bands. In fact, I personally use Bollinger Bands or BB for 2-3 different usage. Sometimes we use price moving out of the bands to be the overbought or oversold situation. Sometimes we use the formation and closure of two or consecutive bars out of the bands to indicate a strong trend. Let me discuss two of my favorite Bollinger Bands trading strategy here.
Bollinger Bands Trading Strategy #1
Using Multiple Bands
In this strategy, all you will have to take into consideration for that is that:
- Sixty-eight percent of a typical price action lies between plus or minus of the same standard deviations.
- Ninety-five percent of a typical price action lies between plus or minus 2 standard deviations.
- Ninety-nine percent of a regular price action lies between plus or minus 3 standard deviations.
The setup for multiple Bollinger Bands trading strategy
So depending on this fact we can use multiple Bollinger Bands to create a complete trading strategy. I have described below is the complete setup you will have to put to your DAILY or intraday chart:
There are 6 Bollinger Bands, and that looks like the following, you can attach them in your Zerodha Kite charts. This is a simple strategy and you can also use other charting platforms like Metastock or AmiBroker or any other broker’s platform.
- 1st BB (20,1.5) Lime
- 2nd BB (20,2) Yellow
- 3rd BB (20,2.5) Orange
- 4th BB (20,3) Purple
- 5th BB (20,3.5) Red
- And 6th BB (20,4) Blue
Additionally, add an ATR indicator with a parameter of 20. We can use the ATR to calculate our stop loss for the trades taken.
This is a counter-trend trade. So if you are not familiar with counter-trend trading, you first need to learn it. But believe me, counter-trend trades are one of the lowest risk high reward tradings. Because if you can identify the end of a trend you can ride the next and opposite trend with a small risk and high reward. Now watch the image below once again.
I hope you like rainbows! Essentially, you have 13 lines. Each one is resistance or support in this Bollinger Bands trading strategy. I think the best way to show you this method is to show you a lot of examples, so eat your heart out. SO, the example above, let me show you when I would have entered and why.
Bollinger Bands PDF
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Bollinger Bands Trading Strategy #2
Using Bollinger Bands Squeeze
Yes, that’s my other favorite Bollinger Bands trading strategy and I use it in my charting software Amibroker. Before we go more into the strategy lets take a look at what is Bollinger Bands Squeeze?
The difference between the top and bottom Bollinger bands (BB) is called the BB range. Sometimes the price is trending and both the bands are expanding and sometimes the Bollinger bands are contracted and the price is in a narrow range. At times of contracted BB, there is a very low BB range. This is also called a Bollinger Band Squeeze. Once the squeeze occurs price tries to break out above or below the tight range and this is a trading opportunity catching the breakout.
The Bollinger Bands Squeeze Trading Strategy:
- Look for a BB squeeze.
- Note the price range during the squeeze.
- Watch for a breakout OR breakdown above or below the bands.
- Trade the breakout.
- Keep a stop loss using the Parabolic SAR.
- Keep at least a 1:1 OR 1:1.5 target.
For you, I am presenting you with a Bollinger Bands Squeeze AFL for AmiBroker users.
A Practical Example of Bollinger Band Squeeze
Watch yesterday’s end of day chart of GRASIM. Price was moving inside a squeeze (yellow color) for some time and yesterday it has broken out. Trend players can trade long with a stop below the Parabolic SAR value of 1048. Check the image below.
Another Counter Trend Bollinger Bands Trading Strategy
This is also called a Head Fake. Watch the example below to see the end of day chart of BOSCHLTD below.
- Watch for a BB squeeze.
- Wait for a breakout above OR below.
- Just after the breakout watch for a reversal bar.
- Enter counter-trend trade.
- Keep a stop loss above the last high.
Bollinger Bands is a real high-profit indicator that we can trade in multiple ways. It shows us the amount of volatility in the market. Similarly, it identifies when a market is overbought or oversold. I suggest you play with this indicator and try to test new strategies. However, if you find a better strategy do not forget to post it in the comments section below. I will backtest them and add my comments here.
Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.