Bolly Band Bounce Trade: 3 Powerful Ways to Trade

The Bolly Band Bounce Trade is a relatively well known trading strategy which works on the principle of reversion to the mean. When prices are at either of the extreme outer bands, prices tend to snap back to the mean, which in this case happens to be the 20 period moving average. At the outset, the Bollinger Band Bounce strategy can be traded by buying when prices are at the lower Bollinger Band and sell deals are recommended when prices are near the upper Bollinger Band. However, if this methodology is applied and traded as is, it is not hard to incur losing trades. This is because, besides the Bollinger Band bounce, prices can also tend to ‘walk the band’ when it is at one of the extreme outer bands.

This brings to question as to how to effectively trade the Bolly Band Bounce Trade.
In this article, we show three ways traders can trade the Bolly Band Bounce Trade Strategy more effectively.

1. Bolly Band Bounce Trade – Using Candlesticks for confirmation

The first way to improve the effectiveness of the Bolly Band Bounce Trade Strategy is to use candlestick patterns as a confirmation that prices will bounce off the outer bands. In the chart below, we have identified the various reversals off the Bollinger band by considering candlestick patterns.

In the above chart, we can see that when the candlestick patterns are considered when price is near the outer bands, the trade is more effective. The doji reversal pattern identified at the lower end of the Bollinger Band has seen prices revert to the mean in all the identified reversals. Likewise, when price was trading at the upper end of the band, the bearish engulfing pattern signaled a successful reversal to the middle Bollinger band.

2. Bolly Band Bounce Trade – Using Divergence

Trading with divergence is another way to make the trades more effective using the Bollinger Band bounce method. When prices are trading near the outer bands, we compare the highs or the lows to the oscillator and when there is a divergence, the appropriate position is taken. In the following chart, we have identified various bullish and bearish divergences that are formed on the chart, corresponding to when price was trading near the outer bands. Notice how effective these trades are instead of having to blindly buy or sell at the outer bands.

Bollinger Band Bounce – Using Divergence

3. Bolly Band Bounce Trade – Support/Resistance

The Bollinger Band bounce can also be used in conjunction with support/resistance levels, both horizontal as well as trend lines.

Bollinger Band Bounce – Using Support/Resistance

In the above chart, we can notice how prices and the Bollinger bands react to the identified support and resistance levels. Every time prices attempt to break out of or touch the extreme outer bands which coincide with a previously identified support or resistance level, we can initiate a long or short positions by booking prices to the middle Bollinger band or target the next identified support or resistance level.

Bollinger Band Bounce – A versatile and a flexible strategy

As you can see from the above three examples, the Bollinger Band bounce is not just a strategy in itself but is flexible enough to be used on any type of technical analysis. It is this flexibility that makes the Bollinger Band bounce a very ideal trading methodology which can be incorporated into any existing strategies or can be used to compliment price action trading.