As noted in the title of this post, I’ll be using the next few paragraphs to discuss the Bollinger Bands trading strategy. Using the Bollinger Bands indicator I’ll uncover the potential power behind this simple but often overlooked trading tool.
Bollinger Bands were developed by John Bollinger to determine overbought and oversold conditions within a market. Additionally, for a complete breakdown of bollinger bands check out this post from investopedia.com. However, with some additional information you’ll soon see they’re capable of much more than that!
First, Bollinger Bands are constructed of 3 lines. A 20 period moving average line and a pair of upper and lower lines generally 2 standard deviations from the average line. Additionally, this can be changed within the indicator settings. I generally prefer a (+/-) 1.5 standard deviation setting. The 1.5 setting creates a few additional trading opportunities but also opens the door for more losses so there is a trade off. Regardless, both settings are effective.
I’ll provide below the steps needed to identify and manage a potential trade. Followed by an image with a series of trades, and a breakdown of possible profits and losses for those trades.
In any case, lets get to the strategy!
Bollinger Bands Trading Strategy Overview
Identify a break of the upper line, the midline, or the lower line. Thats right! We’re looking for breaks of any line at any time. No once a year setup here. However, should you prefer even faster paced trades try using the 1 min or 5 min charts. In any case, I’ll be focusing on the 1 day chart to improve potential returns.
Step 1: The Setup
Upper band break – Bullish trade setup
Lower band break – Bearish trade setup
Midline band break going up – Bullish trade setup
Midline band break going lower – Bearish trade setup
Step 2: Profit Target & Exit criteria
Identify profit target prior to entry.
Exit criteria will be determined when price breaks above or below the mid line or when the profit target has been acheived. In addition, if a mid line break is used to identify a trade an upper of lower band break will be used.
Step 3: Trade Managment
Monitor the trade twice a day. No more, no less!. Give the trade an opportunity to be successful or become a failure. Thus, I typically monitor trades 30 minutes after market open and again 30 minutes prior to close. These time periods both avoid and benefit from traders becoming active in the market. However, please be aware its easy as a new trader to constantly want to take profit or stop losses quickly, this will result in poorer performance long term and isn’t in any way necessary.
That’s all there is to it. The Bollinger Bands Trading Strategy presented here is likely to be one of the easiest strategies you’ll ever learn. Moreover, it could very well be the most profitable strategy you’ll ever learn as well.
Intel (INTC) Stock Chart via ThinkorSwim
Have a look at the image below. I’ve indicated all potential trading candidates from the time period selected. Additionally, I’ve provided the corresponding entry and exit prices to support the identified trades.
|1 – 1/21/20||100||$60.43||$66.24||$581|
|8 – 6/25/20||100||($58.47)||–||–|
51% profit vs capital outlay
As can be seen, using the Bollinger Bands Trading Strategy on Intel over the past 6 months we could have yielded a $2,418 dollar profit. However, had we elected to only participate in trades to the upside we would have realized a smaller profit of $1,111 dollars. In any case, a nice profit for the money at risk.
I Hope you enjoyed this strategy! However should you have any questions or feel you could make this strategy better please leave your thoughts in the comments below. Additionally, If you liked this strategy and want to see other strategies feel free to view my videos page for more great stock and options ideas.
May God bless and keep your trading profitable,