Today we will not only talk about one of the indicators but also suggest specific signals that you can implement in the Bollinger Bands strategy. Bollinger bands are used to measure volatility relative to the moving average. They consist of two lines that run on either side of a 20 simple moving average. As the gap between the bands widens, the higher the volatility and vice-versa.
- 1 Bollinger Bands Indicator overview
- 2 How do you add Bollinger Bands when you're trading?
- 3 How do you use Bollinger Bands effectively?
- 4 Summary of today's Bollinger Bands strategy
Bollinger Bands Indicator overview
In order to be able to create a Bollinger Bands strategy it is very important that you have a good understanding of the construction and operation of the indicator. Bollinger Bands are created by two bands (lines) that run on either side of a SMA20 line. This indicator is used to measure market volatility. As such, they can be used to help you predict the best trade entry points.
The three lines of the Bollinger Bands indicator are as follows:
The upper band is equal to the SMA20 added to twice the 20 day standard deviation of the price.
The lower band is equal to the SMA20 minus twice the 20-day standard deviation of the price.
The middle band is the 20 day simple moving average.
How do you add Bollinger Bands when you're trading?
After logging into your trading account and setting up your chart, click on the indicators feature ad select volatility. Next, select Bollinger bands.
Click on the Setup and apply tab on the Bollinger bands window.
Set the period to 20. Finally, click Apply to save the changes.
How do you use Bollinger Bands effectively?
Bounces from the upper and lower Bollinger Bands
Since the indicator forms a band in which the price moves, it seems quite reasonable to trade inside this band. So the easiest signals are when the price reaches the upper or lower band. If the price reaches the upper band we get ready to sell, if it reaches the lower band we get ready to open a buy position. With just these two simple signals you can create a Bollinger Bands strategy.
However, many signals will create loss-making positions. Just look at the chart below and you will see that with a dynamic price movement, it can reach the bottom band and continue its downward movement. Or it can quickly reach the upper band and not stop there at all.
Is Bollinger Band effective?
Looking at the graph above, one might think that this efficiency varies. So how to make the mentioned Bollinger Bands signals more effective?
First, you can wait for additional confirmation, such as the appearance of a reversal candlestick pattern on the lower or upper band. Secondly, you can filter trend signals and only open positions that follow the direction of the long-term trend as determined by the EMA200, for example.
It is also possible to change the width of the band. How do I change the Bollinger Band Width? Simply change the deviation parameter from 2 to 3 or higher. On the chart below you can see that this procedure will reduce the number of signals and improve their quality or effectiveness. The white lines are the ribbon with the deviation parameter set to 3.
Breakthroughs of the upper and lower Bollinger Bands
The next 2 signals will be in opposition to the previous ones. I would suggest using them in highly volatile markets. Cryptocurrencies, for example, are such a market. I would like you to start thinking like a speculator yourself while reading this article about building Bollinger Bands strategy. Sometimes you just need to look for methods or tricks that will improve the tools you use. Such a trick can even be the right choice of the market.
A buy signal occurs when the candle closes above the upper band. A sell signal occurs when the candle closes below the lower band. Simple, isn't it? I have shown 2 such entries on the BTC chart below. As an addition, which I highly recommend, I have also included here the long term EMA200. It is supposed to filter trades by defining the trend. Thus, I can take buy positions provided that the close of the signal candle is above the EMA200, and short positions below the EMA200.
Summary of today's Bollinger Bands strategy
As you can see simple rules can create a working strategy that you can successfully use to trade CFDs or digital and binary options on IQ Option. I would add that although these signals contradict each other, by adding the aforementioned EMA200 as a filter, you can use all 4 simultaneously taking into account the current market situation and long-term trend. Such a strategy has a good chance of success regardless of trading style. It is suitable for day trading and scalping but also swing trading.
Now that you've learned how to trade Bollinger Bands strategy on IQ Option, go ahead and try this indicator on your IQ Option trading account. Please share your findings in the comments section below.
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