Bollinger Bands is one of the leading technical analysis indicators in trading. With the signals that this indicator brings, you can predict price action in short and medium terms very accurately. So what is Bollinger Band indicator? How to use Bollinger Band trading strategies and formula reasonably and effectively. In today’s article, I will help you to clarify it all.
Video on how to use Bollinger Band trading strategies
What is Bollinger Band indicator?
Bollinger Bands is the name of an indicator taken after the name of a trader who invented this indicator. This is a technical analysis indicator that is heavily used in market analysis. When combined with Japanese candlesticks, the signals that Bollinger Bands offers investors are very accurate.
Bollinger Band indicator structure
Bollinger Bands consists of 3 main elements:
- The topmost is the Upper Band – Red.
- In the middle, it is the Middle Band. This is the SMA20 (average closing price of 20 candlesticks) – Orange.
- The bottommost is the Lower Band – Yellow.
Important signals of Bollinger Bands
Traders use Bollinger Band for many different purposes. However, in general, it carries the following two important signals.
Price trend signals
This is a visual signal that Bollinger Bands offers to be able to identify the ongoing price trend. For example,
- The price is in an uptrend
In an uptrend, prices usually create Japanese candlesticks in the upper band zone (the zone limited by the 2 upper and middle bands). When the price crosses the upper band, it tends to fall back into the Bollinger Bands. When the price touches the middle band (SMA20), it tends to rebound.
- The price is in a downtrend
On the contrary, in a downtrend, the price creates Japanese candlesticks in the lower band zone (the zone limited by the 2 lower and middle bands). When the price falls out of the lower band, it tends to bounce back into the bands. When the price touches the middle band (SMA20), it tends to go down.
- Signals when the market is moving sideways
This is the most effective signal that Bollinger Bands gives to traders. Specifically, when the price goes sideways, it will fluctuate within the Bollinger Bands. Especially, when deviating from this Bollinger Bands, the price will adjust back into the bands.
Effective binary options trading strategies with Bollinger Band
This is an indicator used in many trading strategies of different trading styles. In this article, I will show you some of the simplest and most effective strategies to use the Bollinger Bands indicator.
Strategy 1. Combine Bollinger Bands indicator with Support and Resistance
This is a proven highly effective trading strategy. The basis for opening an order is when there are enough 2 entry signals from Bollinger Bands and levels (Support/Resistance) when the price goes sideways. For example,
Conditions: The 5-minute Japanese candlestick chart, Bollinger Bands indicator (20.2). Identify levels when the market moves sideways. Open orders with an expiration time of 15 minutes.
How to open an option:
+ Open an UP order when the price deviates from the lower band of the Bollinger Bands and touches the Support zone.
+ Open a DOWN order when the price deviates from the upper band of the Bollinger Bands and touches the Resistance zone.
Strategy 2. Combine the Bollinger Bands with the RSI indicator
This is also a very effective trading strategy when using Bollinger Bands as an entry point and RSI indicator in finding the adjusted price range.
Conditions: The 5-minute Japanese candlestick chart, Bollinger Bands indicator (20.2), RSI indicator (14). Open orders with an expiration time of 15 minutes.
Bollinger Band formula:
+ Open an UP order when the price falls off below the Bollinger Bands and the RSI is in the oversold zone (30).
+ Open a DOWN order when the price breaks out of over the Bollinger Bands and the RSI is in the oversold zone (70).
Strategy 3. Combine Bollinger Bands with special candlesticks (Pin Bar, Doji, etc.)
This is very effective when the appearance of special candlesticks is the direct reaction of the price. When prices create these candlesticks outside the bands of the indicator, this is when we open an order.
Conditions: The 5-minute Japanese candlestick chart, Bollinger Band indicator (20.2). Open orders with an expiration time of 15 minutes.
Bollinger Band formula:
+ Open an UP order when the price breaks out of the upper band of Bollinger Bands. And at the same time, it creates a bearish reversal candlestick (Bearish Pin Bar, Gravestone Doji, Hammer, etc.).
+ Open a DOWN order when the price falls out of the lower band of Bollinger Bands. And at the same time, it creates a bullish reversal candlestick (Bullish Pin Bar, Dragonfly Doji, Shooting Star, etc.)
Things to keep in mind when using Bollinger Bands indicator
- The maximum power that Bollinger Band can bring is when the market is sideways and there is no impact news.
- In addition to the use when the price is sideways, Bollinger Bands is also used when the price follows a trend. Trading strategies will be presented in the following article.
- It is advisable to combine this effective indicator with at least one price signal (candlestick and reversal candlestick pattern) for safer transactions.
Familiarize yourself with Bollinger Bands indicator for at least 2 weeks on your DEMO account to verify its effectiveness. I wish you successful transactions.