- Bollinger Bands Trading Strategy – Basics
- At a glance – Bollinger Bands Trading Strategy
- The Bollinger Bands Formula
- What do the Bollinger Bands tell us?
- Weighting of the Bollinger Bands
- This is how you trade with the Bollinger Bands
- Bollinger Bands as Buy Signal
- Frequently asked questions and answers about the Bollinger Bands strategy
Bollinger Bands Trading Strategy – Basics
In this article, we will not only explain how the Bollinger Bands trading strategy works, you will also get all the important basics about the calculation and the opportunities and risks of this method. Very important at this point, in the end, it still needs experience and other technical indicators to assess a trade, despite a detailed guide.
At a glance – Bollinger Bands Trading Strategy
Time needed: 10 Minuten.
The 3 steps of the Bollinger Bands strategy briefly explained:
- Activate bands
Activate the “Bollinger Bands” indicator on Tradingview or the chart view of your exchange.
- Find entry
Wait until the price hits the lower band and is confirmed there (bounces). If the band is respected, you can open a long position. For short exactly the same applies only in the other direction. In this case, you should set a stop loss order for hedging your risk.
- Profit and Resistance
Adjust your stop loss as soon as your trade is in profit. Meanwhile, you can already take partial profits at the middle band. In general, do not stay too long in your trades and take profits in time.
The Bollinger Bands Formula
First, let’s start with the basic calculation of the Bollinger bands. The bands are composed of the moving averages of the high points, low points and the average of the price. For a detailed formula and description, see Bollinger Bands on Wikipedia. The Bollinger Bands are calculated from the equal average of a time period, usually the last 20 time units. Example: In the 1h chart, we see the Bollinger Bands calculation based on the last 20 hours.
Important: The upper and lower bands are multiplied by the factor 2. The mean value is also called SMA (moving average).
What do the Bollinger Bands tell us?
If a price is above a band, the band defines a so-called “support” from a trading point of view, if a price is below a band, this is understood as a resistance. Moving averages are important and respected indicators for trend following and price levels in many areas of trading.
This perspective on the price gives us information for good entry and exit scenarios. After the confirmation of a support, there are often good entries into the trades and after the confirmation of a resistance, there are good exits. In combination with for example the RSI or the MACD, Bollinger Bands are a very powerful tool in trading.
Weighting of the Bollinger Bands
Even if the bands as such have a strong significance, the weighting depends mainly on the time horizon. A Bollinger band on the 1m chart does not have the same significance as a band on an hourly or on a dayly chart. Keep this in mind in your analysis and trading. The 9MA Close Moving Average indicator is also particularly helpful in combination with the evaluation of support and resistance of the Bollinger Bands. Here you have to make your own experience.
This is how you trade with the Bollinger Bands
As always in advance, there is no guarantee for the occurrence of prices or circumstances. You will need other indicators besides the Bollinger Bands and some experience in dealing with this type of trades.
Step 1: Activate Bollinger Bands
The Bollinger Bands belong to the traditional trading indicators, these are usually provided free of charge via Trading View at all exchanges. Search for “Indicators” and you will now find “Bollinger Bands”.
Step 2: Find an entry point
As you have already learned, if a price is above the bands, the bands below serve as support. Wait until a price hits a lower band and wait for the bounce. If a price falls below the band, it is considered broken and should no longer be used for entry. However, if the price respects the band and bounces off it, you can set your long position here.
If possible, hedge your trade with a stop loss below the band. If the price breaks the band, your entry has failed and you should wait for a new opportunity.
Step 3: Let profits roll and take resistances into account
If your trade is now in profit, carefully re-tighten your stop loss, make sure you have enough distance to the price so that you are not stopped out too early. Often it is a good idea to take a partial profit or the entire profit just before the middle (SMA) or the upper Bollinger Band. In classic swing trading, you don’t want to stay in the trade long. When choosing your time horizon, consider the volatility (range of fluctuation) of the band to be able to trade profitably at all after fees. Too narrow bands often can not be traded profitably!
Bollinger Bands as Buy Signal
Now you understand how the Bollinger Bands work. For many traders, the Bollinger Bands serve especially as a buy or sell signal. The Bollinger Bands are also a popular and often used indicator for trading bots or trading algorithms.
Frequently asked questions and answers about the Bollinger Bands strategy
The most common interpretation is that a price which is close to one of the Bollinger bands is expected to move towards the other band soon.
The Bollinger bands are based on normal distribution. They consist of three moving averages, the upper, lower and middle band. Since they are averages, they react more sluggishly than the respective price.
A Bollinger breakout is when the price of an asset breaks out up through the upper or down through the lower band.
A downward Bollinger breakout occurs when the price breaks downward through the lower of the Bollinger bands. This is usually interpreted as a sell signal. However, if the price breaks from below through the lower band upwards, this is usually interpreted as a buy signal.
An upward Bollinger breakout occurs when the price breaks upward through the upper of the Bollinger bands. This is usually interpreted as a sell signal (to take profit).
Important risk notice:
This service or the provider advertised here is only suitable for professional traders. Users without sufficient experience usually suffer a total losswhile trading here. Trading with leverage is highly risky and leads to poor risk management. Use this service only as a professional trader with sufficient experience in trading and leverage.
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