April 30, by JB Marwood. This article looks at four Bollinger Bands trading strategies and tests some basic ideas using historical stock data.

Bollinger Bands are a useful and well known technical indicator, invented by John Bollinger back in the s. They consist of a simple moving average usually the 20 period and two upper and bottom bands which are placed a number of standard deviations away usually two. When the two bands are far apart, the stock or security is highly volatile, and when the bands are close together volatility is lower.

Bollinger Bands are thus the basis for many different trading strategies such as the Bollinger Bands squeeze, the Bollinger Bands breakout, Bollinger Bands reversal and riding the Bollinger Bands trend. The next image shows the Bollinger Bands overlaid on a price chart with green and red arrows.

This is a trade example taken from strategy number two, which you can read about below. The upper band is then placed 2 standard deviations above the 20 MA and the lower band is placed 2 standard deviations below.

Of course, you are allowed to use any parameters you like, but you should remember that if you change the number of standard deviations to 2. I like Bollinger Bands a lot, because they are excellent for measuring volatility and they can be overlaid on any time series not just a stock price. Bollinger Bands can be used on volume, open interest, sentiment data, almost anything. They are therefore very flexible and allow traders a quick way to use standard deviations in their models.

As I said before, Bollinger Bands are an excellent indicator but only if you use them correctly, and the inventor, John Bollinger, created a number of rules to guide traders as to how to use them. You can see the full 22 Bollinger Bands rules here. In other words, if a security closes above the upper band you should see this as a breakout and go long. Conversely, if a security closes below the lower band you should go short.

The most common way to trade this strategy then, is to look for a close above the upper band or a close below the lower band. You then go long or short on the next open. There is a compounded annualised return of just 4. When short positions are taken out and the system is run long only, the performance improves, to 5.

As mentioned earlier, Bollinger Bands can be used in many ways and you could write a whole book just about Bollinger Bands strategies alone. The exact sell criteria is not shown so I will assume that we exit the stock when the reverse occurs.

To test this strategy I have also included some extra liquidity rules so that we avoid thinly traded penny stocks , a ranking rule in order to choose between signals and a market timing rule so that we do not trade during a bear market.

In addition, we will spread risk so that we can hold up to 20 positions at one time. This data includes delisted tickers and is adjusted for corporate actions. As you can see from the results of the test, the strategy was able to return The high win rate of this strategy makes it appealing and the idea looks to have potential.

It must be noted, however, that the results do depend on getting good price fills on the open. I tested the strategy again using the buy price as half-way between the open and the high, and the sell price as half-way between the open and the low, and the annualised return dropped to 3. To improve this system I would suggest looking more closely at the entry price and ranking mechanism.

This is a bit trickier to model using the simulator. But it is possible to come up with a strategy by specifying the number of higher opens or closes above the upper band.

Tales From The Trenches: A Simple Bollinger Band® Strategy

Or by the number of lower opens or closes below the lower band. The strategy uses the open price to calculate the default Bollinger Band parameters 20,2 and trades are entered on the same day close.

And it uses a liquidity filter to avoid thinly traded penny stocks and the like. Choose lowest ranked signals first. The results show a One of the reasons why the strategy works well, however, is that it relies on trading on the close.

This might be a more accurate representation of the price fills we would actually get when trading the system. Overall, the results are pretty good. With some decent tools and a little bit of discretion there may be some potential to be found here.

Below is the full equity curve from But what if those tags occur when the stock is already in an uptrend? Maybe there is a possibility that a close below the bottom Bollinger Band could actually be a good time to trade the pullback? We need the stock to be in an uptrend and we only exit by trailing stop.

As can be seen below, the results are OK. Annualised return in the in-sample period was In the out-of-sample period, the annualised return was Again, the strategy suffers from the problem of trading right on the close, so this strategy and strategy three might benefit from some discretion. However, the higher win rate of strategy 2 suggests that strategy 2 might also be worth investigating. Whereas trading strategy two relies on getting good price fills on the open.

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Three Bollinger bands strategies that you need to know

Wow this was great. Thanks for this, helped clarify quite a bit!! I have been trading almost the exact opposite way they were intended haha I have been shorting on a close above and long on a close below. I have also been picking break outs or break downs based on the tightening of the bands. There are so many different ways to use the bands. Trading the squeeze scenario, where the bands tighten, is definitely something to look into next as you are then trading volatility.

I use a longer term version of Strategy 3 with a 50 period BB.

Double Bollinger Bands Strategy To Trade Forex

My filter is that 50 day SMA should be above day SMA. Stop loss is a close below day SMA. Works pretty well as a long term trend following system. Effectively it is equivalent to a Golden Cross system only long trades with closes above the upper BB used as entry points. Cheers and good trading. So looking to take advantage of the Squeeze as well. Subscribe to the mailing list. Notify me of follow-up comments by email.

Notify me of new posts by email. JB Marwood is an independent trader, educator and writer specialising in trading systems and stock trading.

Using Bollinger Band® "Bands" To Gauge Trends

He began his career trading the FTSE and German Bund for a trading house in London and now works through his own company.

He also writes for Seeking Alpha and other financial publications. Nothing on this site is to be construed as personalised investment advice. Please see the full disclaimer. Charts Amibroker Systems Research Tools I Use Brokers Blog About Amibroker Book Free System Latest Top Posts.

Bollinger Bands Trading Strategies Put To The Test. This article looks at 4 Bollinger Bands trading strategies and tests some basic ideas using historical stock data. Bollinger Bands are a very useful indicator. See More Posts Like This One Testing Moving Average Crossover Strategies On Stocks: A Short-Term Reversal Strategy That Beats The Market Following The Trend Is Not Enough Testing The Shooting Star Candlestick Pattern Stop Losses On Stocks: Ultimate Guide Part 1 Candlestick Analysis For Professional Traders Shorting Leveraged ETFs — The Easy Strategy Limit Risk And Capture Upside With A Barbell Trading Strategy Which Is The Best Moving Average?

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Andre May 1, 1: JB Marwood May 1, 7: Glad this article helped Andre, how were you using Bollinger Bands before? Andre May 1, 9: However reading this post it makes so much sense as to why it wasent working.

JB Marwood May 1, Ravi Iyengar May 5, Have read your book as well and got some pretty useful ideas from it. JB Marwood May 5, That sounds like a solid strategy Ravi, I like it. Leave a Reply Cancel reply Name Email Website Subscribe to the mailing list Notify me of follow-up comments by email. My 4 Best Intraday Trading Techniques. Classic Trading Books That Inspire New Ideas.

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