Best Bollinger Bands Trading Strategy You Should Learn

Do you ever feel puzzled when you see those three lines on the screen showing the price range of the stocks you're interested in? Do you want to know what they can reveal about the market situation?

 

Let's make things clear and grasp the idea behind the Bollinger band.

That three-lined indicator you see is known as the Bollinger band.

The Bollinger Band is like a tool that helps us understand how much the prices of financial things go up and down. It was made up by a person named John Bollinger in 1983. Imagine it like three lines put together, and these lines are also called bands.

The middle line shows the regular average of the price (for 20 days, usually). The other two lines, the top line and the bottom line, are kind of like a bit higher and lower than the middle line. They show how much the price usually goes up and down, kind of like a measure. This measure is called standard deviation (normally 2). This standard deviation shows the difference between those two lines – the high one and the low one.

If the space between those lines is small, it means that the prices aren't changing a lot – they're not going up and down much. When the space gets bigger, it's like the prices are jumping around more. So, when these three lines work together, they can show us if the prices are kind of high or low compared to usual.

 

You also need to know How to Read Bollinger Bands?

Best Bollinger Bands Trading Strategy

Here are the 7 best Bollinger Bands trading strategies in a simple way that works in every scenario and know Bollinger Bands Best Setting.

 

1). Bollinger Squeeze

This happens when the lines get closer to each other. It's like a rubber band being pressed. This tells us that the prices might suddenly go up a lot or down a lot.
After the lines stop being squished, the prices might go up or down – we don't know which one. If they go up, it's good news for buying. If they go down, it's not so good – that's selling. But remember, the squished lines alone don't tell us to buy or sell. They just give a hint that something might happen.

 

2). RSI Strategy

The Bollinger band has a small problem – it doesn't tell us how strongly the prices are moving.
That's where the RSI comes in. It's like another friend. This friend checks if the prices are going up more times than they're going down, or the other way around. It's like counting. RSI goes from 0 to 100. If it's above 70, that means the prices are going up too much and might come down. If it's below 30, it's like the prices went down too much and might go up soon.

When the prices seem to go higher but the RSI says they're not really strong, that's a sign of weakness. It's like saying, "Hey, something's not right." On the flip side, when the prices look lower but the RSI says, "No, they're kinda strong," that's a sign of strength. It's like a thumbs-up.

 

3). Reversal Strategy

Imagine the Bollinger bands as rubber bands. They usually keep the prices in between. But sometimes, they stretch too far and then come back to the middle. This can show us that the prices might go the other way around soon.
But, to know for sure, we need help from other things like support and resistance (kind of like helpers) and the shapes of the candlesticks (they're like signs).

 

4). Trade Within the Bands

When the prices went really high or really low, the Bollinger bands don't stretch much. They're like resting. And when they're resting, the prices might just go up a bit and down a bit, like playing.

If the bands are going straight, the prices are like to stay inside. So, when there's no clear direction, it's clever to buy when the price is near the bottom and sell when it's near the top. This works better when the prices are just moving around without deciding where to go.

 

5). Moving Average Strategy

Here's an easy one. When the price goes above the middle line (which is like an average), it might be time to buy because things are getting better. If the price goes below that line, maybe it's time to say goodbye and sell.

You can look at different stocks all at once with the following Chart Layout. It's like having many TVs showing different shows but for stocks.

 

6). MACD Strategy

Just like a good chef uses different ingredients to make a delicious dish, traders use different tools to make smart decisions. Bollinger Bands are one of those tools. But they work even better when you use them with something called the Moving Average Convergence Divergence (MACD) indicator.

Think of the MACD indicator as a sidekick to Bollinger Bands. When they work together, they can give even better hints about when to make a trade. The MACD indicator helps you know when the prices might change by looking at how some lines cross each other.

 

7). Price Action Strategy

Price Action Strategy Imagine you're playing a game and you're really good at spotting patterns. The Price Action strategy is kind of like that. It helps traders spot when the prices are about to do something special.

Using Bollinger Bands with Price Action is like having two secret weapons. First, you look at the Bollinger Bands and see if the prices are close to the lines or far away. Then, you use the Price Action strategy to spot something called a "signal." This is like a sign that says, "Hey, get ready, something interesting might happen!"

One popular signal is when the price touches the edge of the Bollinger Bands. It's like a little ping telling you to pay attention. And when you see another special pattern in the price chart, like the "morning star" pattern, it's another hint that the prices might change soon.

Unlock the art of mastering price action strategy through the price action course.

 

Bollinger Bands Best Setting

When it comes to using Bollinger Bands in trading, it's like picking the right spices for your favorite dish - it all depends on what you're cooking up! Imagine you're in a bustling Indian market, trying to find the perfect spices for different types of recipes. Well, just like that, Bollinger Bands have their own set of "spices" or settings that work best for different styles of trading. If you're not using the right "spices" for the right dish, you might end up with something that doesn't taste quite right.

So, let's break it down. Bollinger Bands are like a tool that helps traders understand when prices might go up or down. But the trick is, the settings of these bands should match the way you're trading. There are different types of trading but four main ways traders do their thing:

 

1. Scalping: Think of this like quick-fire cooking. Traders who scalp want results in a short time. For this type, you'd want the moving average line to be around 10, and the sweet spot for the standard deviation value (that's the "spice") is 1.5. This combo can help you catch those rapid price movements. Know how to do scalping trading and earn profits in few minutes.
2. Intraday Trading: This is like preparing a special meal for the day. Intraday traders want to make their moves within a single day. For this, use a moving average line around 20, and the "spice" level, or standard deviation value, should be 2. These settings can help you make decisions that fit the day's flavors.

 

You also need to know the best intraday trading strategy for multiplying your profits.

 

1. Swing Trading: Picture a leisurely feast that lasts a few days. Swing traders hold onto their trades a bit longer. So, they need a different mix of "spices." The moving average line should be about 50, and the standard deviation value should be around 2.5. This combo is like marinating your trades, giving them time to soak in the right flavors.
2. Position Trading: This is like slow-cooking a grand family recipe. Position traders think long-term. They're in it for the long haul. For this style, set the moving average line close to 200, and the standard deviation value at 2.5. This slow-cooked combo can help you savor the bigger trends.
   
   
   Remember, just like how you wouldn't use the same spices for every dish, you shouldn't use the same Bollinger Bands settings for every type of trading. Each style needs its own perfect blend. And just like a good chef, you need to taste and adjust. Sometimes the "spices" need a little more or a little less to get that perfect flavor.

 

Remember, these are cool ways to think about the Bollinger band, but they're not like magic spells. You can choose what works best for you. Just like choosing which shoes to wear – you go with what feels right.

 

 

FAQ

Que 1. What are Bollinger Bands?

Ans: Bollinger Bands are a technical analysis tool designed by John Bollinger in 1983. They consist of three lines that show the price range of financial assets. The middle line represents the average price, while the upper and lower lines indicate price volatility.

           

Que 2. How do Bollinger Bands work?

Ans: Bollinger Bands help traders understand price movement. The middle line is the average price (usually over 20 days), while the upper and lower lines show price volatility based on standard deviation. When the space between the lines is small, prices are stable; when it's larger, prices are more volatile.

           

Que 3. What is the Bollinger Squeeze?

Ans: The Bollinger Squeeze occurs when the bands converge, indicating low volatility. This could lead to a significant price move, either up or down, once the bands expand again.

           

Que 4. How can the Bollinger Bands be used for trading strategies?

Ans: Bollinger Bands offer various trading strategies:

• RSI Strategy: Combine Bollinger Bands with the Relative Strength Index (RSI) to identify overbought or oversold conditions.
• Reversal Strategy: When bands stretch and then return to the middle, it suggests a potential price reversal.
• Trade Within the Bands: Trade when prices are near the top or bottom of the bands during periods of low volatility.
• Moving Average Strategy: Buy when prices cross above the middle line and sell when they cross below.
• MACD Strategy: Combine Bollinger Bands with the Moving Average Convergence Divergence (MACD) indicator for better trading signals.
• Price Action Strategy: Combine Bollinger Bands with Price Action patterns to identify potential price movements.

           

Que 5. What is the best setting for Bollinger Bands?

Ans: Bollinger Bands settings depend on your trading style:    

• Scalping: For quick trades, use a moving average of around 10 and a standard deviation of 1.5.
• Intraday Trading: Set the moving average at about 20 with a standard deviation of 2.
• Swing Trading: Use a moving average of around 50 and a standard deviation of 2.5 for medium-term trades.
• Position Trading: For long-term trades, set the moving average close to 200 and the standard deviation at 2.5.

           

Que 6. Can Bollinger Bands predict price movements with certainty?

Ans: Bollinger Bands provide insights into potential price movements based on historical data and volatility, but they don't guarantee specific outcomes. Traders should use them in conjunction with other indicators and analysis methods.

           

Que 7. How can I use Bollinger Bands effectively?

Ans: To use Bollinger Bands effectively, understand your trading style and goals. Experiment with different settings and combine them with other indicators to develop a comprehensive trading strategy.

           

Que 8. Are Bollinger Bands foolproof trading tools?

Ans: Bollinger Bands are valuable tools, but like any indicator, they have limitations. They work best when used alongside other indicators and thorough analysis.

           

Que 9. Is Bollinger Bands trading suitable for beginners?

Ans: Bollinger Bands can be used by traders of all experience levels. However, beginners should take time to understand the indicator, practice with demo accounts, and consider seeking guidance from experienced traders.

           

Que 10. Where can I find more information on Bollinger Bands and trading strategies?

Ans: You can find more information on Bollinger Bands and trading strategies in websites such as ours - StockDaddy, trading forums, books on technical analysis, and educational platforms dedicated to trading. Remember to verify information from reliable sources.