How to trade bollinger bands in any market. From the bollinger squeeze to extended price, learn how to use them in your trading

1. www.netpicks.com

2. Bollinger Bands are a popular trading indicator that was
introduced to the trading world by John Bollinger in 1983.
The visual nature of the Bollinger Bands makes it simple for a
trader to see if price has extended far from the average security
price.
This tells a trader if the instrument is priced too high or too low
from an average price.
Bollinger Band Indicator Explained
Bollinger Bands consist of three lines:
• The upper Bollinger band is set 2 standard deviations away
from the center line. A touch of the high is considered a
high price
• The center line, the middle band, is a simple moving
average SMA, usually 20-day simple moving average, and is
understood to represent the intermediate trend of the
instrument
• Bottom line of the band is also set 2 standard deviations
from the center line. A low price is considered when
interacting in this zone
The upper and lower bands will also contract and expand
depending on the volatility of prices.
• Narrow bands indicate a security that is experiencing low
volatility
• Wide or widening bands will show that volatility is returning
to the instrument

3. This is a daily Forex chart that highlights the features of the
Bollinger Band indicator.
Note that the touches of the upper band is not a sell signal and a
lower band touch is not a buy signal.
The information is only telling that price is either high or low in
relation to an average price.
Using Bollinger Bands as Part Of A Trading Strategy
John Bollinger was clear that the Bollinger Bands were not a
trading indicator by themselves giving out buy and sell trading
signals.
It is not as simple as buying or selling when price tags the bands
but can give the trader valuable information to assist them in
trading decisions.

4. Learning how to trade with the Bollinger Bands is straightforward
but the actual buy and sell signals traders are looking for, have to
come from an add-on approach.
Bollinger Band Squeeze - Price Compression
Markets trend and markets range and from these price ranges,
we can get big moves as price begins to breakout from the
compression.
The "squeeze", not the Bollinger Band Keltner Channel squeeze,
indicates that volatility is not present in the market. We are
looking for signs that volatility may be on the horizon.
We can see the Bollinger Bands compressed together in this chart
of Bitcoin. Trading the Bollinger Band squeeze can be as simple
as:
1. Look for the BB squeeze to occur
2. Mark off the high and low of the forming range

5. 3. Using price action and structure to look for the probability of
a break in a particular direction
On this chart, we see that price before the breakout is settling in
the bottom third of the range. The fact that price is unable to
trade higher than it did on the left side of the range, tilts the
edge to the downside.
Trading High Or Low Bollinger Band Tags
The 20 SMA shows the intermediate trend and a strategy that can
be used to trade these tags, are counter trend trades.
Specifically, we would look for signs that indicate a mean
reversion trade is a high probability trade.
To do so, we can use the double top or bottom formations and
are called M or W patterns. I would add to these structures
actual price action instead of blindly shorting or buying on the
pattern alone.
Using an example of Wheat futures, we can see at 1 and 2 price
has put in a double top pattern. You could trade these blindly

6. however we can add a simple failure test to aid us in a better
entry.
You can see at #2 that price has poked above the BB as well as
the high at #1. We can see how price rejected at #1 which
indicates sellers in the market.
Where do most traders put their stop loss on shorts? Right above
resistance.
Price pokes above the resistance, clears out stop and your entry
can be at the close or use a sell stop below the candle that
cleared the highs.
You can reverse this pattern into the "W" pattern and reverse the
trading steps.
Walking The Bollinger Bands - Price Stays High or Low
An example of strength or weakness that traders should take
note of is when price hugs the upper or lower band.
You have very little in the way of pullbacks to enter the trend and
if you are lucky to be in a walking the band trend, be on alert for
sudden shocks against you.

7. This is the stock of Home Depot and price was hugging the upper
band giving little in the way of pullbacks to enter the move. We
do have the beginning of a squeeze (can you spot it) but then
volatility picks up.
A few good lessons on this chart where there was a 23% increase
in the price of the stock:
1. Closes outside or at the upper band do not always translate
into a mean reversion trade. John Bollinger classified closes
outside the BB as continuation moves.
2. Does the increase in volatility shown via the widening of the
bands indicate a possible collapse in the price? Can you see
how the bands can show an ABCD price move?
3. When price is showing extreme strength, the collapse in
price can be explosive. Price collapsed about 15% in 7 days.
It is vital to ensure you show discipline in taking the profits but
protecting yourself from sudden downside price shocks that can
take away a huge chunk of your gains in a matter of days.

8. If facing a chart with virtually no pullback on your trading time
frame, you could use a lower time frame to find an entry.
This example assumes that price is riding the upper Bollinger
Band and the second last day closes off the high of the day.
Dropping to an intra-day time frame may show a pattern such as
the one shown on the right. You could simply buy stop the noted
location with your stop under the low of the day. Remember,
when these trends fail, it can be violent.
Bollinger Bands Trading Strategy You Can Test
We can design a trading strategy that can be used for very short
term trading, day trading or swing trading using the Bollinger
Bands as explained.
I want to include a measure of momentum and for that, I am
going to used the MACD (moving average convergence
divergence). The settings of the MACD will be tweaked to make
the 3/10 oscillator made famous by Linda Raschke.
Our long rules (reverse for short trades):

9. • We need price to interact with upper band and the
momentum indicator to put in a new high
• Price must pull back to around the moving
average. Pullback trading has an actual edge in the market
• Enter off a candlestick or a hook in the fast line of the MACD
• Stops can be around the swing low or use the average true
range indicator. Targets at the line or 1R
• We can enter a squeeze on a breakout pullback move or
using price structure as seen in the squeeze section above
This is a 5 minute chart of Gold futures (you could scalp these
setups as well) and covers many of things that have been
discussed.
1. Bollinger Bands were in squeeze mode and price broke out
to the upside. Our MACD made a new high and price has
interacted with the upper Bollinger Band. Price pulls back
close to the moving average and gives us a decent reversal
candle for a breakout/pullback trade entry

10. 2. Price penetrated the upper band but our momentum
indicator has put in lower highs. We are not allowed to
trade any pullback to the moving average zone due to the
MACD. We note the high.
3. Price touches the upper band and the MACD puts in a new
high. Pullback to the moving average for a long trade
4. MACD makes a lower high so no pullback trade would be
allowed. Price breaks the high, forms a long shadow and
sets us up for a mean reversion trade.
This would be a good strategy to use in my "trading challenge"
article if you are looking to try that.
Sum It Up
Bollinger Bands are a great indicator to help you set rules in
regards to the trades you will take.
The squeeze will allow you to quickly find instruments that are in
consolidation and may be ready for a breakout trade.
Pullbacks are a tried and tested trading method and the bands
will help you determine which impulse legs may be ripe for
another move after the corrective phase.
Don't trade the Bollinger Bands by itself. Adding in the MACD
and price action as described is a positive addition to a powerful
trading indicator.
As with all trading strategies, you must have a trading plan that
includes exact risk parameters.
Hope you enjoyed this article and picked up some great
information to help in your trading. To help you trade patterns
such as pullbacks like a pro, check out my free guide on "Price
Pattern Trading" that you can instantly download.