John Bollinger is a well-known and successful trader. He developed an indicator called Bollinger Bands. This indicator is quite famous and is available in the MetaTrader terminal suite.
Although Bolinger himself described his indicator for trading on daily charts, it can also be used in scalping on smaller timeframes. We recommend fifteen minutes. Read about what a timeframe is and how to work with timeframes in our article.
Below we will try to describe various trading signals from Bollinger bands.
What Bollinger Bands Look Like
The indicator is shown on the chart with three sinuous lines. At their core, they are all moving averages (an indicator for determining the current trend by smoothing out fluctuations and noise). Since our Bolinger is a mathematician, he came up with his own formulas for these averages, we will not dwell on them. What is important: the lines from a certain channel in which the price is located, and from how it behaves at its borders, we make trading decisions.
The main purpose of Bollinger Bands is to measure price volatility. Volatility is how large the price movement is: if the price passes 20 points in an hour, this is low volatility, if 100 – high.
The narrowing and widening of the bands show us the level of volatility. The narrower the bands, the lower the volatility, and vice versa.
We marked the place of reduced volatility with a white rectangle – you can see that the bands have narrowed. This is followed by the expansion of the bands and the increase in volatility – that is, the price has moved up very sharply. It always happens in the market: its calm state is replaced by an explosive one. The purpose of the indicator is to show the trader that the market is preparing to explode.We open deals on increasing volatility.
Switch to the fifteen-minute chart and take a close look at our indicator. We need to wait for the moment the bands narrow. In the figure, we marked such a place with a round zone. The narrowing of the bands is often followed by a breakout from which we can profit.
It can be seen that outside the zone we have designated, the bands begin to expand – volatility increases. So we are getting ready for work.
We need to wait for the price to go slightly beyond the upper or lower border of the channel when the Bollinger lines begin to expand. Below in the figure we fix the following situation:
The bands begin to expand, the price rises above the upper line (the place is marked with a white rectangle). As soon as this has happened, we open a sell trade. Profit, as a rule, is taken from the middle line. It can be seen that the goal has been achieved.
A new exit of the price – now beyond the lower border, and again the price “went” to the middle line. This could already be a buy deal.
Another exit for the lower border, after which we see a very sharp increase in volatility and a sharp rise in prices. They could also take a profit.
Then the market calms down, and we again wait for the narrowing of the bands, after which we repeat the trade.After the bands began to expand and opportunities for deals appeared, we would not recommend opening more than 2-3 orders. Don’t be greedy – the one who follows the rules of money management earns more.Important: to work it is worth waiting for a good narrowing of the bands. The longer the period of reduced volatility, the more reliable it is to work at the end of it.
Let’s consider another signal of the Bollinger line indicator. If in the first case we expected a decrease in volatility, then in this case we are waiting for a stable trend to appear.
We look at the picture.
We marked an uptrend with a white rectangle. The price sticks to the upper Bollinger line and moves up along it. In this case, we wait for the price to touch the middle band and fix the profit at the upper one.
Here’s how to do this, using an example:
We have a steady uptrend as indicated by the indicator. In the area indicated by the small yellow rectangle, the price touches the middle line.Open a buy trade (yellow rectangle) and fix a profit at the upper band (green rectangle)
Further, as we can see, the price breaks the middle line and the trend reverses. But it doesn’t matter to us – we have already taken our profit.Don’t forget: there are no endless trends. This means that one profit per one detected trend is more than enough. Don’t be greedy.
Then we see a downtrend – the price sticks to the lower Bollinger band. Again, we wait for growth to the middle line and open a sell deal in the area of the green rectangle. We take profit in the yellow zone.
We showed two simple signals from the Bollinger Bands indicator on a 15-minute timeframe, but you can use these signals on any one.The bottom line is that if there is no stable trend in the market, the price, when trying to go beyond any of the channel boundaries, which formed the Bollinger bands, most often returns to this channel.
When working, do not forget about the rules of money management – do not overestimate the risk too much. And you shouldn’t open too many trades. Your goal is trade stability, not pull all the money out of the market in one day.
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And Read About : Bollinger Bands and RSI