Bollinger Bands Strategy

Posted by OliverPearson 0

Bollinger Bands Strategy

The Bollinger Bands strategy is based on the Bollinger Bands indicator. This is one of the most effective strategies. It helps an investor pinpoint the right time to buy CALL or  PUT options.

BOLLINGER  BANDS

You can enable the Bollinger Bands indicator on the live chart on this website to see how it looks like.

A straight line that connects two or more highs is a line of resistance.

A line that connects two trend lows is a line of support.

An area between the line of resistance and the line of support is called as a band or trend channel. The Bollinger Bands indicator acts as resistance or support based on some peculiar to it parameters.

An upper band (Bollinger Bands) is a level of resistance showing the highest prices which are about to fall. This is the level at which selling starts.

A lower band (Bollinger Bands) is a level of support showing the lowest prices at which trades are made.

A moving average is an indicator (Stochastic Oscillator). It has a periodicity of 20.

Volatility is a variable of a bandwidth or channel showing the price action over time.

The strategy based on the Bollinger bands works well with a sideways or flat trend when the follow a trend strategy has no effect.

The Bollinger bands strategy is a kind of an indicator forecasting the range of trading and the rate at which the prices change.

Bollinger Bands

Analyzing the chart, we understand that the price stays in the channel between the upper and lower bands. The Bollinger bands indicator is composed of a central moving average and two bands. The central moving average shows an average price value, the bands mirrorsvolatility, that is, a price range.  The wider the range is, the higher the volatility is. If volatility increases, the bands widen, and vice versa, if volatility decreases, the bands narrow. The central moving average shows the market trend.

Volatility Forecast

The bandwidth constantly changes. If volatility rises, which means that the channel expands, then market entry can be risky. Reduction of the channel entails impulsive movements, and a trader can start trading.

The Bottleneck Chart

Strategy Bollinger Bands

If the Bollinger Bands are differently directed, they can form various patterns. For instance, you can see even a kind of a bottleneck on a chart. And if to uncork the bottle, champagne explodes to the sides. The prices act in the same way, that is, reduction is followed by abrupt movements, but what direction they will take is unknown. However, it’s doesn’t matter. What matters is that the prices move and change, and you can invest both in selling and buying the options.

What Price Action Tells You

  •  If a price bounces off the band, it will tend to reach another band. 
  •  If the price is outside the band, it will keep moving in the same direction.
  • If the band contracts in sync with decrease in volatility, abrupt price movements typically follow.
  •  If 3or 4 consecutive highs or lows (bars) are higher or lower the Bollinger band, the price will reverse.
  •  If a price moves upwards out of the narrow channel, this is a signal to buy a CALL option, and if a price moves downwards out of the narrow channel, you can buy a PUT option.

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