Bollinger Band Strategy Explained for Beginners

Bollinger Bands are essentially composed of three lines. You’ll need to know everything about these three lines to formulate the best momentum strategy. The upper and lower bands are drawn either side of the middle band; which is the moving average of the Bollinger Band. The distance between the upper and lower bands are determined by a standard deviation. This is the volatility of your chosen CAPEX.com instrument. You determine what the standard deviation is, but commonly it’s set to 2. Most set the period time to 20 days too. So, this is what the formula would look like for the upper and lower lines with 20 days and 2 as the figures:

• Upper line= 20 day SMA (standard moving average) + (20 day standard deviation multiplied by 2)
• Lower line= 20-day SMA (standard moving average) – (20-day standard deviation multiplied by 2)

You can set your time period to weeks, days, hours or even minutes, depending on your Bollinger Band strategy.

Opportunities – The upside to using these Bollinger Band strategies

• Useful indicators: Any Bollinger Band strategy you use is the best possible indicator of any trends going on in the market. It’s easy to locate, and determine any kind of volatility when you use a Bollinger Band strategy, and knowing when volatility will occur will give you a step up when you’re looking to make profit.
• Easy to learn: A Bollinger Band strategy isn’t as complicated as an Ichimoku strategy, or even a momentum trading strategy. You only have to learn the functions of the three bands – upper, midband and lower – and what it means when your price trend falls above and below them. With that in mind, any trader can make some serious profit on CAPEX.com trading platform using our Bollinger Band
• Trend setter: The Bollinger Band strategy excels in determining when new trends will start, and current trends will end. This is invaluable knowledge to know if you’re new to the market, and gives you that boost to hop on some instruments that will guarantee you profit.

Risks – The potential downfalls of relying on a Bollinger Band strategy too much

• Limited as a stand alone: A Bollinger Band strategy has one function – determine volatility and trends so you know when to enter and exit a trade. That is it’s sole purpose, and this can fairly limit your overall perspective on the market by relying on a Bollinger Band strategy on its own. We at CAPEX.com recommend you use other indicators with it.
• False signals: When trends are low, and a market is stable, a Bollinger Band strategy can produce false signals. These signals can be distracting, and annoying, especially if you’re focusing on more stable trades like bonds or indices. Our CAPEX.com recommendation is to stick to the volatile trades – Forex, stocks and cryptocurrency.
• Reliance on market movements: The tendency to follow recent market movements means a Bollinger Band strategy can’t predict upcoming price movements. This means you mightn’t get a price signal until the trend has already begun.

There’s many different ways to determine a position’s value. In most cases, you want to enter a trade when it is oversold, and exit when it is overbought. Moving averages are the best indicator you can use for a Bollinger Band strategy. A moving average determines the average price of a trade over a specific time frame. You have flexibility of the time period on our CAPEX.com trading platform. The basic rule for a moving average is that if the price is above the moving average, the trade is up. And, vice versa.

You can also use an ATR (Average true range), which determines a trades volatility. Often used with commodities, it is useful in identifying entry and exit points. A high ATR means high volatility, and a low ATR means lower volatility.  It’s a useful tool for a Bollinger Band strategy when used with other indicators.

The double bottom Bollinger Band technique is an effective technique for a volatile market. This is when you allow the trade to sharply fall below the bottom Bollinger Band. Eventually, the trade will bounce back to the middle band, indicating a high price, before falling back down onto the lower band, and closing there.

This is a long strategy to use, as the double bottom usually indicates a sharp rise in the trade, bouncing up to the middle and the top bands. When studying the double bottom, it’s a game of patience. If you’re too impulsive, and close your position too quickly, you could lose a serious potential for profit. You have to let the double bottom run its course, and when it finishes, you’ll take full advantage of this Bollinger Band strategy. On CAPEX.com, it’ll be simple to spot a double bottom on our flexible trading platform, which you can even test in the demo trading platform.

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In the reversal Bollinger Band strategy, the trader looks for any potential sign of a reversal of a current price trend. It’s a technique that requires a great knowledge of the trade you’re entering, and of the instrument’s volatility too. For example, you decide to enter a EUR/USD position

You may see during your Bollinger Band strategy that the price may rise above the upper band, but rapidly close below the lower band. This may indicate that the price will eventually rise above the upper Bollinger Band again. You’re aiming for the middle band being the optimal position to exit the trade, and make a profit. The great thing about the reversal Bollinger Band strategy is that you have the flexibility to take a long or short position. As long as you follow our CAPEX.com Bollinger Band, and close the position at the right time, it does not matter.

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