John Bollinger developed what was to become known as Bollinger Bands as a useful measurement of volatility. It is I think unnecessary to go into the maths of the Bollinger Band as they can be found on every trading platform.
As John Bollinger himself noted low volatility begets high volatility so it is useful to have a graphic representation of low volatility so that we can look for our entry in that area to take advantage of the high volatility that must come.
The standard setting are a 20 look back period and 2 standard deviations apart around a simple moving average. This setting is fine for longer term trades but if you are e day or swing trading then change the look back period to 11 and leave the standard deviation as they are at 2.
Notice the constriction in the bands where the arrows are, like someone has squeezed a sausage!
This is the area of low volatility and you can see the high volatility that follows, that’s what we want, we don’t want to be waiting for an age for the action to unfold.
Here then we have a simple strategy to trade.
Bollinger Band Strategy
1) Wait for an area of low volatility
2) Wait for the candle to close over the simple moving average. – black line
3) Wait for the price to retrace to the simple moving average. – black line
5) Stop loss for a short trade. The top of the candle that crossed the line.
6) Stop loss for a long trade. The bottom of the candle that crossed the line.
Let’s take a look at how it pans out.
At (A) the green candle closes over and then retraces 2 candles later to touch the line.
At (B) There is a tiny candle that closes under the line and the next one opens on the line, that’s a touch and so it’s a go at that point.
At (C) same thing it opens touching the line.
At (D) This is a very large candle so it’s not surprising that is does not retrace, you can’t win them all!
I hope you enjoyed this article. trading Bollinger Bands can be very profitable!