Olymp Trade Bollinger Bands Indicator Trading Strategy

Olymp Trade Bollinger Bands Indicator Trading Strategy
Bollinger Bands (“Bollinger Lines”, or BB) is a technical analysis tool that has the features of both a trend indicator and an oscillator. It determines a possible range of the asset price change according to the nature of its movement and volatility.


Description

The Bollinger Bands indicator consists of the lines on the asset price chart, which limit the price dynamics above and below respectively. This is a kind of dynamic lines of support and resistance, which most of the time are placed quite far from the price.

“Bollinger Bands” look like the envelopes of moving averages. The difference between them is that the lines of the envelopes are located above and below the moving average curve at a fixed distance expressed as a percentage. And the limits of Bollinger Bands are constructed at the distances, which are equal to a certain number of standard deviations.

Since the magnitude of the standard deviation depends on the volatility, the bands’ width is adjusted automatically. It increases when there is an uptrend and decreases in more stable periods.


Constructing

The main rule for the construction of Bollinger Bands is the following: about 5% of the price should be outside these lines, and 95% of it should be inside (when calculating for 2 standard deviations). The indicator is formed by three lines.
  • The middle line is a simple moving average (a 20-period one by default).
  • The top line is the upper band that is usually two standard deviations above the moving average.
  • The bottom line is the lower band, which is usually two standard deviations below the moving average.
The unique feature of Bollinger Bands’ ranges is that their width changes in response to a change in the market volatility. A separate Bollinger band is constructed as a band around the simple moving average, but its width is proportional to the standard deviation from the moving average for the analyzed period.

The band expands when the market is volatile, for example, during the news release. And it narrows when the market is flat.


Bollinger Bands calculation

Bollinger Bands are formed by three lines. The middle line is a simple moving average. It is used to calculate a relative definition of high and low prices of the market. This is what a mathematical formula for constructing Bollinger Bands looks like:

BB = MA ± k * StdDev

where:

MA — moving average;
StdDev — standard deviation;
k — standard deviation coefficient.

The standard deviation StdDev is calculated as:

StdDev = SQRT (SUM ((CLOSE – SMA (CLOSE, N))^2, N)/N)

Where N is a number of periods which are used to calculate the simple moving average (for example, 20 candles), and SQRT is a square root.

When constructing Bollinger bands, one usually uses the standard deviation coefficient k which is equal to 2. At this value, 95% of all prices fall within the price range, which is limited by the bands.

To calculate the standard deviation value, you should select the calculation period. As a rule, they use the same value as for the smoothing coefficient of the moving average.

Period

The recommended period for Bollinger Bands is from 13 to 24 (20 is the most common one). The deviation is usually chosen within the range from 1.5 to 5, and the recommended value is selected from 2 to 3.

You can also use Fibonacci numbers, round numbers 50, 100, 150, 200 and the number of days in the trading and calendar year (240, 365). But remember that large periods reduce the sensitivity of the indicator, which is unsuitable in low volatility markets.

The price mostly moves within the channel, but it can also cross Bollinger Bands in case of a sudden movement. However, if the price crosses the upper or lower band too often, you should increase the period, and if the price rarely reaches the outer bands, the period should be reduced.
 


Price and Time Frame

Closing prices are mostly used for the calculation of Bollinger Bands. Average or weighted average prices can also be used.

Bollinger bands work well on any timeframes, but, as a rule, they are used for day trading. Remember that the settings for different currency pairs and different timeframes should be selected separately.

 

The main signals of the indicator

1.Trade the middle band.
If the price crosses the middle band upwards, it is a bullish signal. If the price crosses the middle band downwards, it is a bearish signal.
Olymp Trade Bollinger Bands Indicator Trading Strategy
2. Trade after the price returns into the channel.
The position should be opened against the leaving point of the indicator band. Wait for the candle / bar to be closed inside the indicator and open the position towards the middle band. Logically, the entry point is similar to the standard entry point for oscillators.
Olymp Trade Bollinger Bands Indicator Trading Strategy
3. Use the outer bands.
The bands are adjusted so that they form dynamic levels of support / resistance for the current price movement. When it approaches the upper level of resistance, you can sell, and when it approaches the lower level of support, you can buy.
Olymp Trade Bollinger Bands Indicator Trading Strategy
 


How to set up Bollinger Bands indicator on Olymp Trade?

First go to the left indicator tab below the Olymp Trade screen and select Bollinger Bands
Olymp Trade Bollinger Bands Indicator Trading Strategy
By default, the BB indicator is set at 20 and the standard deviation is 2.0
Olymp Trade Bollinger Bands Indicator Trading Strategy


When prices move in Bollinger Bands

The market has three main states: Up Trend (bullish market), Down Trend (bearish market) and Side way (Sideways market). These 3 types of markets correspond to 3 Bollinger Bands.

In the bullish market – Up Trend: You will see prices move mainly in the upper band (from the middle band to the upper band)

In the sideways market – Side Way: You will see the Bollinger Bands indicator shrinking and the price moves up and down in a narrow band area.

In the bearish market – Down Trend: You will see the price move in the lower band (from the middle band to the lower band).


3 Methods to create orders with Bollinger bands indicator

Method 1: Blooming lily Bollinger Bands

Visualizing with naked eyes, the BB indicator will narrow when the price goes sideways. Suddenly, the price follows the trend and BB expands. Technologists call this as Bollinger Bands blooming lily, which implies that the price ends the sideways chain to develop a new trend.
Olymp Trade Bollinger Bands Indicator Trading Strategy
And of course, you need to follow the direction the new trend goes. Normally, when the price bounces off BB, it tends to go against into bands. But when blooming lilies, the time the price bounced off upper or lower bands is when to open the command to follow it.


Method 2: When the market goes sideways

In the sideways market, prices will stay within a certain Bollinger Bands area. At this time, the 2 upper band and lower band are considered to be the price barrier. As long as the price falls off the upper or lower band (the price bounces off), you can open a reverse order.

Example: The price gets out of upper band and goes up = Open a DOWN order. On the contrary, the price gets out of the lower band = Open a UP order
Olymp Trade Bollinger Bands Indicator Trading Strategy
This type of playing is very effective when the price goes sideways within a certain range, especially when currency pairs are not affected by any news.

Experience

You can choose EUR/USD for the morning, USD/JPY for the afternoon and EUR/AUD for the evening.


Method 3: When the market has a specific trend like Uptrend or Downtrend

It is easy to spot which area the market is in thanks to the Bollinger Bands indicator. You only need to observe:

The price is moving up like a ladder. The candlesticks are mainly in the upper band. The price moves from the middle band upwards = The market is Uptrend. When you know for sure the market is going up, you should only open a UP order.
Olymp Trade Bollinger Bands Indicator Trading Strategy
Conversely, when the price creates ladders moving down, candlesticks are mainly in the lower band. The price only moves from the middle band to the lower band = the market is Downtrend. You should only open the DOWN order.
Olymp Trade Bollinger Bands Indicator Trading Strategy
Experience when creating orders

When the market is Uptrend, let’s focus on creating UP orders when the price touches the middle band of the Bollinger Bands (i.e. SMA 20). When the price touches, open the UP order

When the market is Downtrend, concentrate on opening the DOWN order when the price touches the middle band of the Bollinger Bands (i.e. SMA 20).


Recommend when trade with Bollinger Bands indicator.

Corresponding with each way of playing Olymp Trade with Bollinger Bands above, you have to use a different way of managing capital. For example: With the blooming lily method, you can follow trends and use compound interest. Or when the market goes sideways, if you use the band-drop style, you should manage your capital evenly.

Experience and feeling are very important in this type of playing. For instance: when the price falls off the Bollinger Bands indicator about 2/3 of the candlestick, it tends to go against into the Bands. But when the price just dropped out of bands a bit, it tended to create one more candlestick outside the bands. You need to focus, observe to experience more

You can combine the Bollinger Bands indicator with some other strong indicators. This will create a complete, safe and highly accurate Olymp Trade trading system

John Bollinger himself notes the following features of his indicator:
  • Sharp price changes usually occur after the band narrows, which means a decrease in volatility.
  • If peaks and bottoms outside the band are followed by peaks and bottoms within the band, a trend reversal is possible.
  • Price movement that starts at one side of the band usually reaches the opposite side. This observation is useful for predicting price benchmarks.
Remember that the professional setting of Bollinger Bands of any indicator requires deep knowledge and good trader training. Take part in Olymp Trade training webinars and trade with confidence!
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