Before we get into the rules of the Bollinger Bands strategy, here are some things that you need to know:
- If price is moving below the 20 period moving average(the middle line) then the market is in a downtrend
- If price is moving above the 20 period moving average , then the market is in an uptrend
- Price has to come and touch the middle Bollinger band line(the 20 period) for any trade to be initiated
- The upper Bollinger band line or the lower band line can be use for take profit
Here’s how to set up the settings in MT4 trading platform:
Bollinger Band settings are: 20 periods and band settings to a standard deviations of 2
Bollinger Bands Trading Strategy Rules
- Check if market is in a downtrend and then price rises up to touch the middle Bollinger band line.
- When middle line is touched, place a sell stop pending order about 3-5 pips under the low of the candlestick that touched it.
- You may wait to see if a bearish reversal candlestick is formed first before you place your sell stop pending order.
- The sell stop pending order must be placed only after this candlestick closes.
- Place your stop loss anywhere form 5-10 pips(or more) above the high of the candlestick.
I hope this chart here makes things a little bit more clearer for you:
Profit Taking Rules
- When price goes back down and touches the lower Bollinger band line (you exit your sell(short) trade)
- Set your take profit level equal to the distance the price traveled in pips during that upswing to touch the middle Bollinger band line(see the blue dotted line below in the chart). So you use that difference in pip movement and calculate at what price level below you need to place your take profit target.
- You can also use the previous swing low(bottom) as your take profit target level.
The rules for buying are completely opposite to the selling rules given above.
- Place your buy stop pending order 3-5 pips above the high of the candlestick that touches the middle Bollinger band line.
- Place you stop loss 5-10 pips or move below the low of this candlestick.
Profit Take Rules For Long Trades
- When price goes back down and touches the upper Bollinger band line, exit your buy trade.
- Set your take profit level equal to the distance the price traveled in pips during that downswing to touch the middle Bollinger band line. So you use that difference in pip movement and calculate at what price level below you need to place your take profit target.
- Use the previous swing high(top) as your take profit target level.
Bollinger Bands Trading Strategy Advantages
We can have small stop losses which will allow to have a larger position size. Trading larger time frames can allow your winning trades to be large compared to intra-day trading.
Fans of price action trading will be able to use candlestick pattern confirmations to further increase the probability of a winning trade. If you get into the beginning of a long term trend trade, you can expect to see some healthy profits.
You can adjust the standard deviation from 2 if you choose to have larger or smaller profit targets. Keep in mind that profit targets can be dangerous as they can cut you out of a trade long before price has gone as far as it can.
Bollinger Bands Trading Strategy Disadvantages
Like all trading systems and strategies, they have faults or weaknesses when market behaves somewhat different to the conditions they were designed to perform well in. The main disadvantage of the Bollinger Bands strategy with 20 period is that in a non trending market, this trading system will perform poorly.