- Written by Sywa Sywa
- Last Updated: 05 September 2019 05 September 2019
- Created: 04 September 2019 04 September 2019
In my Previous Post about my trading Setup, I used Bollinger Band in the main chart with default setup (20 Period of SMA with 2.0 Deviation). What I liked about this Indicator is because it has an Upper Band and a Lower Band. As Bollinger himself said that "when price touches the Upper Bollinger Band, the Price is High, and when price touches the lower Bollinger Band, the price is Low".
Buy Low and Sell High is the key to every trading, this is a concept I embedded in my Trading strategy. By using the Bollinger Band, I can determine when the price is relatively high or when the price is relatively low. Upper and Lower of the Bollinger Band act as a Support and Resistance, this dynamic support and resistance based on deviation from the middle band.
There are several ways to trade with the Bollinger Band :
1. Trading Breakout
2. Trading Reversal
3. Trading Retracement
Gold Breakout Example:
Price breakout is usually preceded by Bollinger Squeeze, which means before any breakout can happen, prices are consolidating by moving in range. Psychologically speaking, the market at this point is undecided, most investors are wait and see. When a breaking news happen, investors are no longer wait and see, they are ready to take stance and therefore start pouring their money to the market, The result of the fight between The Bulls and The Bears will come to light.
Upside Breakout movement as shown in the chart above follows the upper Bollinger Band until it consolidates made some retracement because some people books some of the profit. After a retracement, prices continue to move higher.
Things to remember when trading Breakout:
1. Market are consolidating, there are no winner between the Bulls and the Bear. In other words market are ranging for some times,
a. prices are heading towards the Upper Bollinger Band and then bounce back to the Lower Bollinger Band.
b. Line of the upper and the lower Bollinger Band are flat or almost flat.
These are the signs that market is consolidating and ready for a Breakout.
2. Confirm with other indicators, in my trading setup, I'm using AO for Breakout confirmation.
3. Breakout trading in a smaller time frame has to be inline with the Trend on the Higher Time Frame, this will increase success rate.
4. Beware of False Breakout. False Breakout is where sudden high volatility enters the Market and then sending the price break through the Upper or Lower Bollinger Band, but different with the real breakout which price will follow through the upper and the lower band, false breakout is only temporary. After breaking out the Upper/Lower Bollinger Band it lost its momentum and start reversing in direction.
a. Candle stick or barchart have to be closed above or below the Upper/Lower Bollinger Band.
b. to Protect against sudden reversal, move stop loss at the entry price.
EUR/USD Reversal Example:
When price breakthrough the Upper/Lower Bollinger Band but failed to close beyond the Upper/Lower Bollinger band, this means that this pair has probably lost its momentum and ready to reverse. Price are reversing because they can not break through the Support and Resistance, since there are no way forward the only solutions is backward/Reverse.
My rules for trading reversal using Bollinger Band is:
1. Wait until Heiken Ashi Candle breakthrough the Upper/Lower Bollinger Band but failed to close beyond the Upper/Lower Band.
2. Straight line at the Upper/Lower Band are preferred when making entry.
3. the smaller the space between the candle stick and the Upper/Lower Bollinger band is better for the possibility to success.
4. Different color of Heiken Ashi Candle after the failure of break out is preferrable when making entry decision.
5. Put stop loss at the point of the Upper/Lower Bollinger Band.
6. Always confirm with another indicator.
7. Pin point your entry on smaller time frame for better price (I'm using M5).
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