8. Strategy based on Bollinger bands
In this trading strategy, Bollinger bands are used. This indicator is quite easy to use and can, similarly to trend channels, show the range of price changes in which it moves a significant part of the time. When working with Bollinger bands, moments like when the price drastically crossed the indicator border are considered as signals. Usually, in case of such a sharp exit out of the limits of its usual fluctuations, the price soon tends to return to the central line of the indicator.
Trader’s actions when the signal is formed:
- 1) Add the Bollinger bands indicator to the chart.
Adding the indicator to the chart
Setting up the indicator’s parameters
- 2) Wait for the price to go outside the indicator limits.
- 3) When the price returns to the limits of the indicator and when the confirmation candlestick is closed, you can purchase the option in the direction of the centerline of the indicator.
Buy a call option when the price goes outside the lower limit of the indicator
Buy a put option when the price goes outside the upper limit of the indicator
In addition, the upper and lower limits of the Bollinger bands indicator can be used as resistance and support lines, respectively.
Trader’s actions when the signal is formed:
- 1) Closing of the current candlestick occurs at the limit of the indicator.
- 2) The next candle is directed opposite to the boundary of the interval.
- 3) When the confirmation candlestick appears, you can buy an option in the direction of the centerline of the indicator.
Buying a put option after a rebound from the external limit of the indicator, i.e., from the resistance line
Bollinger Bands strategy
Deeper Insight
Bollinger Bands are a tool that helps you see price deviations on your trading interface. You can use them to trade from band to band, such as from the red line to the blue line.
You can also wait for price to break above or below the outer bands, which shows price breaking through an upper or lower deviation area. After that break, you can watch for entry signals around the middle moving average between the bands, as shown by the yellow arrow.
Another way to use Bollinger Bands is to study how liquid or active the market is by observing the width of the bands. When the bands are wider, price is usually moving with more volatility. When the bands are tighter, the market may be slowing down or preparing for a larger move.
The example above shows a trending market. If you have read through the strategy guides in order, you can see how we marked out the higher highs and higher lows.
When price moves outside of the Bollinger Bands deviation, it can signal that price is trending if market structure confirms it. Depending on where the current run is, it can also mean price has a higher probability of stalling or reversing.
A huge skill in trading is developing a good feel for when price is truly stalling or continuing to run. No one can ever know for sure, but a good way to follow it is by watching price confirm obvious trend like structures. You can see what I mean by following the higher highs and higher lows above the Bollinger Bands deviation.
When the higher high and higher low tendency is broken, shown by the white arrow, notice how price runs back to the opposite band. Price is not just running back to that band. It is really falling back toward the mean price of the current trend.
For me personally, this is a wait and observe structure, especially if I already traded the run well.
Following lower timeframe running structures while using the Bollinger Bands 20 moving average can be an interesting and consistent way to follow price. I look at the 20 moving average as the mean of any structure that runs outside the Bollinger Bands deviation.
The key to using this approach is having a higher timeframe understanding of where you believe price is likely to go. The lower timeframe can help you follow the movement, but the higher timeframe gives you the bigger picture and helps you avoid taking entries with no real direction behind them.
Look at this higher timeframe chart.
When you really start paying attention to higher timeframe wicks and what each candle becomes as it develops, you can start to pick up on telltale signs and hunches about good price structures and deviations to trade.
When I started watching this chart, price was near the red Bollinger Band during the current downtrend. Go back to the picture above and you should be able to see how you can start building your trading case.
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