today I will reveal the best strategy that you can use with
the bollinger bands indicator so, first of all, we all know that it's very
important to identify trends on the market however if you've been trading for a
while you would know that trends don't usually move in a straight line like most trends actually look like this where prices are forming higher highs
and pullbacks the problem is these pullbacks can often lead to false signals
let me give you an example let's say you're using a normal trend indicator such
as the 20 ema if the trends are moving in a straight line like this then the 20
ema gave a perfect signal however if the trend has pullbacks like this it can
be a huge problem because it gave so many false signals
so that is why the bollinger bands is a better
indicator because it can identify the direction of a trend while also taking
these pullbacks into consideration hence it can give you less false signals the
bollinger bands is a very simple to use indicator it consists of three parts a
20 period simple moving average in the middle and two standard deviation lines
above and below it the middle line shows the overall direction of the market if
the line is heading upwards meaning that the market is on an uptrend and if the
line is heading downwards meaning that the market is on a downtrend the two
standard deviation bands are used to detect the volatility of the market if the
bands are contracting or close together it means that the market is on a low
volatility period and if the bands are expanding from each other meaning that
the market is on a high volatility period so a common mistake that i
see traders make is that they use the bollinger bands as an overbought and
oversold indicator so they sell when the price hits the upper bands and buy
when the price hits the lower bands
now let me explain why it's a bad idea to use the strategy
so in this chart notice that the middle line is heading upwards meaning that
the market is on an uptrend now we can see that the price broke above the upper
bands so if you took a short position here let's see what happens the price
instead pushes further to the upside and you would lose your money because if
you are using the indicator as an overbought and oversold signal you are
essentially trading against a trend which is not a good idea so after testing
the bollinger bands indicator multiple times I actually found the most an effective strategy that you can use and the strategy is called the Bollinger
band squeeze so this strategy is based on predicting price breakouts using
volatility what you need to understand is that volatility of the market is
constantly changing from low to high and vice versa meaning that if the market
is on a low volatility period like this eventually volatility will start to
pick up in the future which can lead to big price movements and breakouts so
now it's our job to find these low volatility markets and predict when a
breakout might happen and in which direction will it be
this is how you do it first you need to find a market that
is on a range you can identify this by looking at the middle sma line the line
needs to be relatively flat like this however it doesn't have to be perfectly
flat next the two bands must be close to each other I like to make my job
easier by using an indicator called the bbw or also known as the bollinger
bands width this indicator shows how far apart the bands are if the bbw is low
meaning that the gap between the two lines are close and if it's high meaning
that the gap is further apart note that the two indicators need to have the
same settings for it to work next to predict the price breakout you need to
wait for the standard deviation lines to start expanding which can also be
identified by the rising of the bbw so this means that there's an increase in
volatility and a breakout is likely occurring so
our next job is to predict the direction of that breakout
and the way you do that is by using price action let me give you an example so
in this chart, we can spot a flat sma meaning that the market is on a range and
the two bands are contracting which is also shown by a low BBW next you can see
that the bands are starting to expand which can also be seen by the bbw rising
next, we can see that four red candles were formed one of them closed outside the
lower bands so based on the price action the breakout is more likely going to
happen to the downside so this is a good opportunity to take a sell position
let's look at another example in this chart we can see that the market is on a
range as shown by the flat sma and the gap between the two bands are close
which are also represented by a low BBW next you can see that
the bands are starting to expand which can also be seen by
the rising bbw then we can see three green candles broke out of the upper line
so based on the price action the breakout is more likely happening to the
upside so this is a good opportunity to take a buy position but remember just
because a candle broke out doesn't mean you automatically take a position you
need to wait for signs of rising volatility another indicator that can help me
confirm the direction of the breakout is the money flow index this is how you
do it first you need to change the indicator value to both 50. so now you have
a single line in the middle next if the green line crosses above the middle
line it indicates that it's a bullish signal and if the green line crosses
below the middle line it indicates that it's a bearish signal so
now let's combine this with the breakout strategy that i
just taught you here's the pound dollar and as you can see the market is on a
range as shown by the flat sma and the bands are still contracting next you can
see that the bands are starting to expand and the bbw is rising and down here
you can see that the MFI crosses above the middle line which means that it's a
bullish signal plus a big green candle broke out of the upper standard
deviation line so all these signals confirm that the breakout is more likely
going to happen to the upside so this is a good opportunity to take a buy position
let's look at another example here's the dollar-yen and as you can see the sma
is moving in a flat direction indicating that the market is on range next you
can see that the bands are starting to expand which is also signaled by the bbw
rising and over here we can see that the money flow index crosses below the middle line which indicates a bearish signal and multiple red candles were
formed one of them closed below the lower bands so based on the price action
analysis the breakout is more likely happening to the downside so
this is a good opportunity to take a sell position so now
I'm going to teach you a really effective exit strategy that you can use to
maximize your profits using the bollinger bands indicator so let's say you took
a cell position here and what you want to do is let your trades run until a
candle breaks out of the middle sma line if the candle broke out like this you
close your position let's see this one more time in another chart let's say you
took a long position here so you want to close your trade once the price broke
below the middle sma line notice how by using this exit strategy you were able
to close your trade early and still retained the majority of your profits so i
just revealed to you the best strategy that you can use with the Bollinger
bands.