Double Bollinger Bands Strategy
The Double Bollinger Bands Strategy is a versatile trend following volatility based indicator which is fairly reliable by itself. Developed by John Bollinger, the bands are made up of the outer bands which are placed two standard deviations off the 20 period moving average of price. The bands tend to widen when volatility increases and contract during low volatility or periods of consolidation. It is widely known that when the Bollinger Bands contract, they signal a potential volatility breakout in the next few sessions.
The Bollinger Bands can be traded in a variety of ways. Some of the most commonly used trading strategies include:
- Going long or short when prices reach the lower or the upper bands
- Going long or short when volatility declines, aka the Bollinger Bands contract
- Going long or short when price hits the upper or lower bands, also known as ‘walking the bands‘
Besides the above commonly used methods to trade Bollinger bands, using a double Bollinger Band is another unique way to trade with the bands. The main benefits this has to offer is the fact that by using a higher standard deviation based Bollinger Bands, traders are able to fine tune their entries. The double Bollinger Band tends to be used mostly a reversion to the mean methodology, meaning that when the higher standard deviation Bollinger band tends to contain the price extremes, it signals a reversal to the mean, which is nothing but the 20 period moving average.
The double Bollinger Band strategy as outlined below is ideal for traders at all levels and is relatively easy even for first time traders. With due practice, traders will be able to identify the set ups that occur which usually has a high hit rate of reaching the take profit levels.
How to Apply the Double Bollinger Bands Strategy
The first step to use this strategy is to apply the first Bollinger Band with a setting of 20, 2 and then applying another Bollinger Band indicator with a setting of 20, 3. Once the two Bollinger Bands are applied on the chart, traders can then start looking for entries.
- As a general rule, traders should look for the following pattern or flow to occur before taking a position.
- Prices touch or close outside the outer Bollinger Band
- The next candle or up to two candles see’s prices closing back inside the inner Bollinger Band
- Enter the position on the next candle’s open, set the stop loss to the price level of the outer Bollinger Band on the signal candle and set the take profit to the mid Bollinger Band price level of the signal candle
The Double Bollinger band strategy works across any timeframe, but it is best advised to use this strategy on the 1 hour chart time frame. Traders should also bear in mind that only the most liquid currency pairs with the lowest spreads are considered while trading with this strategy.
Long Set up
In the above chart, we notice that prices initially break close to the outer Bollinger Band. The subsequent candles continue to close outside the inner Bollinger band until we find the set up where prices close back (with the doji candle) inside the inner Bollinger Band. The long position is taken at the close of this candle with stops set to the corresponding price point of the outer Bollinger Band while targeting the corresponding price level of the middle Bollinger band.
Short Set up
In the following chart we first notice that prices break out strongly and close outside the outer Bollinger band. Two candles later, prices then close back inside the inner Bollinger Band. A short entry is taken on this close while the stops are placed at the corresponding high of the outer Bollinger Band. The take profit level is set to the corresponding price point of the middle band. Prices continue to hover above the entry for a while before eventually reaching the take profit level.
Double Bollinger Band Strategy – Simple and efficient
The Double Bollinger Bands Strategy is very simple and efficient at best. By keeping the indicators to a minimum (two Bollinger Bands) and by exercising patience, waiting for the right set ups, traders will find the double Bollinger band not
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