Have you heard of the bollinger bands trading strategy? Among the many different indicators, one could choose to analyze charts with, there is one that stands out to me. I’m often reminded that there is no perfect set of indicators to put on a chart that will work perfectly for everyone. If only it could be that easy, right?
I know many traders, and almost all of them each have a certain set of indicators that work for them individually. Some more seasoned traders can trade on price action and patterns alone. Moving averages are often used, and I still use them to get an idea of where key support and resistance areas are within a long-term trend, but I don’t like to day trade with them. Therefore, let’s look at a Bollinger bands trading strategy.
Having a set of indicators that make sense to you is imperative, no matter your trading experience level. Having a clean and uncluttered chart is key when flipping through a bunch of charts trying to find a quality setup or chart pattern.
It’s especially apparent when you look into less than 1 hour time frames. That is when I remove all my moving average indicators and deploy my trusty Bollinger Bands.
Bollinger Bands for Day Trading
The Bollinger Bands trading strategy has always served me well, especially with day trading. They allow me to keep a simple and clean chart, which allows one to see price action clearly while giving very obvious buy and sell signals.
They work well with a secondary indicator like MACD or RSI. However, you may have to modify the settings for different periods. For a while, I used both, but before long, I found that FSTO is self-adjusting and smooth, which works great for me.
FSTO, or the Fast Stochastic Oscillator, is a very basic-looking secondary indicator, but it has quite a bit of math behind it. We can get into that math later. For now, we need to know how to use it. In a nutshell, FSTO essentially indicates the momentum of price. The idea is that the momentum of the price changes direction before the price changes direction.
The indicator is range-bound, indicating both bearish and bullish divergence. Divergence, in theory, will precede reversals. Think of it as a way to verify the buy and sell signals on our Bollinger chart.
The range is where we can find our signals. Above 80 is the overbought zone, 50 is the middle, and below 20 is the oversold zone. D is your actual buy and sell indicator line, and K is used to emphasize divergence, indicating a trend change.
Dissecting the Bands
Bollinger Bands are simple. They work like training wheels for those who eventually learn to trade on price action alone.
I still use them because I like them easily. I can spot trends, patterns, reversals, pivots, and support/resistance zones at a glance. Let’s start in the middle. The middle band is just a 20-period moving average or the average of the last 20 candles on your chart, no matter what time frame you are looking at.
The upper band is two standard deviations above the middle band, and the lower band is two standard deviations below the middle band. The reason for the deviations is to indicate volatility.
The volatility is relative to the distance between the upper and lower bands, and the advantage of this is that it gives you a range of volatility. Price action (candles) that stay within this range are pretty normal and are used to verify the trend. Candles that leave the upper or lower band are known as tags and pokes. Solid candles and candles with short wicks that either go slightly above the upper band or slightly below the lower band are pretty good indicators of strength in the trend.
This is known as tagging the band. A series of solid candles that periodically or consistently tag the upper or lower bands verify a strong trend in any time frame.
This is known as “walking the band.” In a bullish trend, “walking the upper band,” and in a bearish trend, “walking the lower band.”
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Using Bollinger Bands Trading Strategy
Now, let’s talk about pokes. A candle with a long wick is self-explanatory regarding price action, assuming you learned a little about candles. They are not sharp but can poke any of the three Bollinger bands. Bollinger does not tend to walk the middle band but tends to bounce off it mostly.
The buy signal will tend to start with a candle wick poking through the lower band and confirmed divergence on your secondary indicator, but you want to confirm the signal with the next candle.
You want to see the next candle with a solid body that starts at or above the lowest part of the solid part of the previous candle with a wick. The previous candle can also be a doji.
Sometimes, the previous can be a solid candle, but you will want to be pretty intimate with your secondary indicator. Rarely, it can be a series of ascending dojis, often followed by a big move.
When a candle has a long wick above it and pierces the upper band, it is known as an upper band poke. This often indicates weakness in the trend and is typically easy to verify with your secondary indicator.
You also have a third indicator, volume. If volume candles are getting shorter or turning red, you have a further indication that a reversal is likely. If everything checks out, that’s your sell signal.
The Middle Band
Now for the middle band. The middle band can act as resistance in a bearish trend, support in a bullish trend, and act as a short-term pivot.
This is where your candlestick education comes into play. A volatile trend can bounce candles between the middle and upper or lower bands, depending on the trend direction.
Pay attention to the five and 15-minute time frames, too. A cho,ppy one minute will often be much smoother on a 5- or 55-minute min15-minute. You can also spot patterns more easily in those time frames. When in doubt, zoom out and look left. Reversal patterns are key.
More often than not, the candles that bounce off the middle band will have at least a small wick that pokes it. If a solid candle appears to be tagging the middle band, it will often break through the middle band.
This happens mostly after a confirmed trend reversal after an upper or lower band poke. That is when the middle band becomes a pivot point.
The candles after that will sometimes be solid ones straddling the middle band, but watch for a wick. The wick will likely seal the deal. On a rare occasion, that next candle can be a doji.
In this case, watch for your secondary indicator divergence to flip. When that happens, what you think is a reversal can become a pullback.
Trading signals on a Bollinger chart are not always clear on choppy charts. There is a solution. Heikin Ashi candles. For the most part, your FSTO secondary indicator will still be useful on low-volume equities, but your standard candles will not resemble anything useful.
Heikin Ashi candles will smooth the chop and allow you to utilize your Bollinger bands. For traders with a big account, liquidity on low volume can certainly be an issue.
For traders starting with a small account, low-volume equities are great slow-motion practice for Bollinger band day trading. Heikin Ashi candles make it possible.
You can use the Bollinger bands trading strategy with our weekly stock signals.
Final Thoughts: Bollinger Bands Trading Strategy
I learned how to day trade with the Bollinger bands trading strategy first. However, I found them to be useful in any time frame.
This is cool because you can back up your other indicators on daily and weekly charts when moving averages don’t give you a clear answer.
As a rule of thumb, I never mix moving averages with Bollinger bands; nobody wants to see that mess. Stay tuned; I’ve got a lot to write about.