Bonding with the Bands: Bollinger Band Secrets [Part 1]

Welcome to the best video you’ll find on the internet about Bollinger Bands and trading strategies using them! Whether you’re a beginner or an experienced trader, this video is for you. Get ready to expand your knowledge on Bollinger Bands and learn a few simple trading strategies that can help maximize your profits and minimize risks.

Understanding Bollinger Bands

In this video, we will explain how Bollinger Bands work and how you can use them in your trading. We will also discuss some effective trading strategies that make use of Bollinger Bands. But first, let’s understand what Bollinger Bands are.

Bollinger Bands are a technical indicator used by traders and investors to understand how overstretched prices are in relation to the mean, which is represented by the 20-day moving average. You can easily find Bollinger Bands on any trading platform, and they look like this when applied:

Simple BB pic.jpg

As you can see, the prices are surrounded by the “Bands” on both sides. The green line above the price represents 2 standard deviations above the mean, and the red line below the price represents 2 standard deviations below the mean. When prices touch the upper band, there is a tendency for them to go down and revert back to the mean or towards the lower band. Conversely, when prices touch the lower band, there is a tendency for them to go up and revert to the mean or towards the upper band. This happens because Bollinger Bands are based on the principles of bell-curves.

The Concept of Bell Curves and Price Movements

For beginners, imagine plotting a random set of data, such as the weight, height, or income levels of people, on a chart. The distribution of the data would form a bell curve, with most of the data stacked towards the midpoint. In financial markets, the expectation is that prices will mostly trade around the midpoint (the 20-day moving average). However, there will be times when prices move too far up, becoming overextended on the upper band, and times when prices move too far down, becoming overextended on the lower band. These situations provide opportunities for traders.

Responsible Use of Bollinger Bands

However, trading is not as easy as simply buying at the lower band and selling at the upper band. If it were that simple, everyone would be doing it. While Bollinger Bands provide an edge to traders, they need to be used responsibly, like any other technical indicator.

Strategy 1: Buy the “W” & Sell the “M”

Now, let’s outline a unique trading strategy that you can use with Bollinger Bands: Strategy 1 – Buy the “W” and Sell the “M.”

This is a simple yet effective pattern that involves four key criteria. With a little market acumen, you can reduce it to three criteria, improving the chances of a better entry:

  1. Wait for a reaction low to form. This usually happens when securities are falling relentlessly and the reaction low is below the lower Bollinger Band.
  2. Observe the price bouncing to the middle band (the mean or the 20-day moving average). This is usually a “Dead-Cat-Bounce” without much potential. The important point to observe is when the price pauses at the middle band and resumes downwards.
  3. There is a new price low in the security, which holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline.
  4. Confirmation with a strong move off the second low and a resistance break: The pattern is confirmed when there is a strong move off the second low and a break of resistance.

Usually, the buy can be confirmed on the third step itself based on evidence of some bullish candles. By the time the fourth step is confirmed, prices would have already rallied quite a bit. Ideally, a professional trader would use the resistance break to add to their existing “Buy” position(s) in a strategy called “Scaling In.”

After the confirmation of the “W” pattern, prices tend to rally significantly. Capitalizing on these big moves post the “W” confirmation goes beyond the scope of this discussion. We may cover trade management in a separate piece.

Post W bottom confirmation.jpg

Applying the Strategy in Reverse: Short Set-Up and the “M” Top Formation

The same steps can be followed in reverse for a short setup. Here are the steps for a short setup:

  1. Price is making a reaction high.
  2. Price is coming down to the mean.
  3. Price is making a new high (higher than the reaction high).
  4. Price is breaking a support.

This is how the “M” top formation would look like:


[M-Top Formation]

(M-Top Outcome)

Timeframes and Effectiveness of the Strategy

Although this strategy can be applied to any time frame with equal effectiveness, lower time frames are likely to give more signals or trades, while higher time frames are likely to give fewer signals. Intraday traders typically use 15 minutes or 30 minutes for this strategy, swing traders use 60 and 240 minutes, positional traders use daily or weekly time frames, and investors use monthly time frames.

Conclusion: Bollinger Bands as a Valuable Technical Indicator

In conclusion, Bollinger Bands are a valuable technical indicator that can help traders make informed decisions in the market. By combining the use of Bollinger Bands with simple yet effective trading strategies, such as the one we discussed today, traders can potentially increase their profits while minimizing risks.

Remember, there is no one-size-fits-all approach to trading, and it’s important to always do your own research, consult with financial advisors, and use a strategy that aligns with your personal goals and risk tolerance.

Stay tuned for the next part of this video series, where we’ll dive into two more trading strategies using Bollinger Bands. These strategies are designed to help traders further expand their knowledge and potentially maximize profits while minimizing risks.

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