Bollinger Bands Trading Strategies

Welcome to this article on Bollinger Bands Strategy, where we will delve into the world of technical analysis and explore how you can use Bollinger Bands to identify market trends. But first, let’s get one thing straight – Bollinger Bands have nothing to do with music and everything to do with trading.

As a widely used technical analysis tool, Bollinger Bands measure a stock or market’s volatility and help you identify potential breakouts and reversals. By tracking the upper and lower bands around a moving average, Bollinger Bands can help you determine if a market is overbought or oversold and provide insight into possible price movements.

In this article, we will provide an overview of Bollinger Bands and their mechanics, followed by three real-life trading strategies you can use to incorporate them into your analysis. By the end of this article, you will have a solid understanding of Bollinger Bands and be able to confidently apply them to your trading strategy.

Understanding Bollinger Bands

Are you perplexed by trading jargon and technical terms associated with the Bollinger Bands strategy? We are here to enlighten you on this powerful trading tool.

First and foremost, let’s demystify the Bollinger Bands. These bands are comprised of three lines, with the middle line representing the 20-day moving average of a security’s price and the upper and lower bands representing the standard deviations above and below the moving average. The upper band denotes a price level that is relatively high, while the lower band denotes a price level that is relatively low.

But how do you interpret the Bollinger Bands? One popular approach is to look for the price of an asset to move outside of the bands. This is known as a “band squeeze” and can suggest an impending price breakout. Conversely, if the price of a security remains within the bands for an extended period, it may indicate a range-bound market.

Another way to use Bollinger Bands is to identify overbought and oversold conditions. When a security’s price reaches the upper band, it is considered overbought, and a price correction may be on the horizon. Conversely, when a security’s price reaches the lower band, it is considered oversold, and a price rebound may be imminent.

To illustrate this, let’s consider the example of Bitcoin, which has been trading within its Bollinger Bands for an extended period. Suddenly, the Bitcoins price breaks through the upper band, suggesting a potential upward trend. Eventually, the Bitcoins price may reach the point of being overbought, at which point a price correction could occur. In this case, we could spot two corrections where the candles reach outside the bands, giving you 18% and 28% on both shorts. 

It’s important to note that the Bollinger Bands are not infallible and should be used in conjunction with other technical analysis tools and fundamental analysis when making trading decisions. False signals can occur, particularly in choppy or range-bound markets.

So, in which markets are Bollinger Bands most useful? While Bollinger Bands can be applied to any security or market, they tend to work best in markets that exhibit strong trending conditions. Commodities, cryptocurrencies, and forex markets are particularly well-suited to the use of Bollinger Bands.

Remember, the power of the Bollinger Bands lies not only in their ability to identify potential price breakouts but also in their versatility as a technical analysis tool.

Bollinger Band Strategies 

Bollinger Bands as a Reversal Indicator for the Cryptocurrency Market

This trading strategy is applicable to almost any cryptocurrency, and it relies heavily on the Bollinger Bands indicator. However, timing the market can be challenging, and false signals can occur, so it’s essential to use additional indicators such as the RSI and the Crypto Fear and Greed Index and look for Candlestick Patterns to confirm our hypothesis.

Suppose we consider the example of Bitcoin’s bull run in November 2021. The RSI was overbought at above 70, suggesting that a top may have been reached. However, this is only one indicator, and other signs of an overheated market must be considered.

We also looked at the Crypto Fear and Greed Index, which showed a value of 75, only 9 points away from its all-time high. This high value indicates that the market sentiment was extremely positive, and traders were likely too bullish. These indicators suggested that the bulls were losing steam, and it might be time to start looking for the right candlestick patterns.

In cases where the market has gained over 100% in the prior months, like Bitcoin or other cryptocurrencies, using Bollinger Bands can be a helpful strategy. When the candles got out of the Bollinger Bands, it can be the best confirmation of a clear entry position for a short.

If we identify an Evening-Star forming, we wait for the third candle to confirm before entering the position and going short Bitcoin or any other cryptocurrency. In this case, we would have been able to correctly identify the top of the bull market using this indicator, giving you almost 80% profit on your trade in the longer run. 

Trading Rules

1. RSI overbought 70+
2. Fear & Greed Index High 60+
3. Identify Reversal Candlestick Pattern (Here: Evening Star)
4. Wait for the third candle to confirm  
5. Go Short

Bollinger Band as a Mean Reversion Strategy

This trading strategy combines two powerful technical analysis tools – Bollinger Bands and the Commodity Channel Index (CCI) – to identify potential price reversals. The beauty of this strategy is that it can be applied to almost any financial instrument, making it a versatile tool for your trading toolkit to capitalize on market trends.

The CCI measures the difference between the current price and its average price over a given period. Values above 100 indicate a strong upward trend, while values below -100 indicate a strong downward trend. The CCI can help you identify potential trend reversals.

To use this strategy, you can combine Bollinger Bands and CCI to identify potential price reversals. If the price moves outside of the Bollinger Bands, and the CCI indicates an overbought or oversold condition, you may look for a mean reversion back towards the moving average. On the other hand, if the price is trading within the Bollinger Bands, and the CCI indicates a trending market, you may look for a continuation of the trend.

To execute this strategy, you should look for candles closing above or below the Bollinger Bands and confirm that the CCI is above 100 or below -100 before entering a long or short position. It’s important to exit the position when the price reverts back to the middle of the Bollinger Bands, as this is an indication that the price trend may be changing. In this case, we showed you various potential entries and exits on the corn chart, with the best trade giving you almost 4-8% or even higher with leverage. 

Trading Rules

1. Look for candles outside the Bollinger Bands
2. Confirm that the CCI is above 100 or below -100
3. Enter Short or Long position
4. Exit when price crosses the middle Bollinger Band

Bollinger Bands Strategy on Unique Markets

When it comes to unique assets, such as luxury watches or rare collectibles, a Bollinger Bands trading strategy can be a smart approach to take. To increase the accuracy of this strategy, we can combine Bollinger Bands with the Choppiness Index.

The Choppiness Index is a technical analysis tool that measures the market’s trendiness. It is calculated by taking the range between the highest high and the lowest low over a certain period and dividing it by the logarithm of the number of periods. This indicator ranges from 0 to 100, where low readings indicate a trendless market and high readings indicate a trending market.

By combining Bollinger Bands with the Choppiness Index, we can identify potential trades with greater accuracy. When the Choppiness Index is below 40 or above 60, it indicates a strong trending market, and the Bollinger Bands can help us determine if the market is overbought or oversold. This combination can be a strong indication that a price reversal is likely to occur.

To demonstrate this strategy, let’s take a look at the Patek Philippe Nautilus Watch Chart on Morpher. We can see three instances where the candles went outside the Bollinger Bands on the 1-hour chart, and the Choppiness Index was below 40 or above 60, indicating a strongly trending market. In each case, we would have entered a long or short position, depending on the direction of the price movement.

We would also add a stop loss to every trade to manage risk. This way, if the trade doesn’t go in our favor, we can minimize our losses and protect our capital.

Overall, this Bollinger Bands trading strategy with the Choppiness Index is a unique approach that can only be implemented on Morpher. If you want to try this strategy with unique assets like luxury watches or rare collectibles, Morpher is the platform for you.

Conclusion 

In conclusion, Bollinger Bands are a powerful technical analysis tool that can help traders identify potential price reversals and market trends. In this article, we have explained what Bollinger Bands are and how to use them in conjunction with other indicators to develop successful trading strategies.

We have presented three great strategies that can be applied to various asset classes, such as cryptocurrencies, commodities, and even unique assets like luxury watches. By using Bollinger Bands and other indicators like RSI, CCI, and Choppiness Index, traders can better understand market trends and potential price reversals.

As the famous Jack D. Schwager once said, “The markets are the great equalizer. All traders are humbled in the face of the market’s unpredictability, its randomness, its sheer force. No one can command it or bend it to his will. The trader is the hunter, and the market is his prey. The trader must be swift, decisive, and unemotional in his pursuit. He must adapt to the market’s movements or perish.” With the right strategy and a little patience, Bollinger Band trading strategies can help you adapt to the market’s movements and achieve your financial goals. We encourage you to try these strategies on Morpher and see the results yourself. Be the hunter that Jack D. Schwager always wanted you to be. 

Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.