Bollinger Bands is a fairly simple trading tool that is widely used by both professional and home traders. Consider why they are so popular among traders.
What are Bollinger Bands?
Bollinger Bands is a trading indicator that helps investors determine when to enter and exit a trade. It is also often used by Binomo platform traders in their trading strategies.
Bollinger Bands help determine the following:
- Continuation or reversal of a trend.
- Zones that can be breached as market volatility rises.
- Periods of market consolidation.
- Possible highs or lows.
- Potential target levels (closing prices).
However, using only Bollinger bands for trading is not a winning strategy, but a risky one since the indicator focuses on price and volatility, ignoring a lot of other information necessary for analysis.
Support and Resistance levels
The indicator helps to assess how the price is located relative to a normal trading range. Bollinger Bands create a frame within which the price is considered normal.
If you see an uptrend, it is essential to understand that someday this movement will reach its peak — the Resistance level. After that, the trend will change, and the price will go down.
If the price moves down, then suddenly seems to hit a barrier and even starts moving up, it is a Support level.
So, if the price leaves the trading range — rises above the upper line, or breaks through the lower line — this can be considered a trading signal.
Trading strategy Bollinger Bands with support and resistance
Consider an example of the strategy for educational purposes using Bollinger Bands.
Basic setup:
- Three major asset pairs: EUR/USD, USD/CAD, and USD/JPY.
- 5-minute Japanese candlestick chart.
- Setting Bollinger Bands (20,2).
- Expiration time of 15 minutes or more.
After the settings, we look at the chart and determine the price support and resistance levels. Weak and strong levels should correspond to different opportunities for the price to bounce when these levels are touched.
Once we have determined the support and resistance levels, we analyze the chart and open a trade according to the following formula:
UP Open = Price breaks lower band + Candle closes at support
DOWN Open = Price breaks upper band + Candle closes at resistance
Note! Binomo provides an opportunity to practice this trading strategy on a demo account for free.
Capital management methods
The best way to manage capital for this strategy is to open a trade with a constant amount. The profitability of the trade of up to 80% will bring a good additional income.
It is well shown in the table:
| 100$ Capital | Amount | Income (80% e.g.) | Loss |
| 1 | 10$ | 8$ | – |
| 2 | 10$ | 8$ | – |
| 3 | 10$ | 8$ | – |
| 4 | 10$ | 8$ | – |
| 5 | 10$ | 8$ | – |
| 6 | 10$ | 8$ | – |
| 7 | 10$ | 8$ | – |
| 8 | 10$ | – | 10$ |
| 9 | 10$ | – | 10$ |
| 10 | 10$ | – | 10$ |
| Total | 100$ | 56$ | 30$ |
Profit = (56-30)/100 = 26% (7 income – 3 losses)
Main notes about the strategy
Here are a few notes that will allow you to use a trading strategy using Bollinger Bands effectively:
- You should not open trades one after another
It is a reversal trading strategy, so open one trade at a time. It is when the red candle breaks out of the lower band and reaches support. Then it closes at support, and a new candle appears. If the price continues to decline and you open another trade at this time, you will lose funds.
- Choose strong levels
You can completely ignore the weak levels when the price crosses the bands and tests the levels. But when the price tests a really strong level, you can open a trade at that moment. Weak levels are located inside the bands. They will be easier to break out than the levels outside the bands.
- Trade when prices tend to move sideways
This strategy offers up to a 90% rate when the price goes sideways. However, this indicator can drop to 40% if there is a trend.
The bottom line
Bollinger Bands is a good tool for identifying trade entry and exit points. However, without the use of other methods of analysis, it can cause losses. And remember that there are no 100% winning strategies; it all depends on your knowledge and trading experience.
