Bollinger Bands are one of the most popular technical indicators used by traders. The bands help identify periods of high and low volatility and can spot potential reversals in the market. In this guide, we’ll cover advanced applications of Bollinger Bands when trading on the BetPro Exchange platform.
Understanding the Bollinger Bands Indicator
Bollinger Bands consist of three lines plotted on a price chart:
- The Middle Band – a simple moving average (typically 20 periods)
- The Upper Band – plots a standard deviation above the moving average
- The Lower Band – plots a standard deviation below the moving average
When price is volatile, the bands widen. During periods of low volatility, the bands contract. The Upper and Lower Bands form dynamic support and resistance levels.
Key Takeaways:
- Bands widen during volatility and contract during low volatility
- The Upper and Lower Bands act as dynamic support and resistance zones
- The Middle Band helps identify the overall market trend direction
Using Bollinger Bands to Identify Trends
One of the most common Bollinger Band strategies is to use the indicator to identify overbought/oversold levels and spot trend reversals early.
Here’s how the bands can help determine the market trend:
- Uptrend – Price consistently touches the Lower Band and bounces back up. The Middle Band slopes upward.
- Downtrend – Price regularly reaches the Upper Band and drops back down. The Middle Band slopes downward.
- Range-Bound – Price fluctuates between the Upper and Lower Bands with no clear directional bias. The Middle Band moves sideways.
Analyzing candlestick closes relative to the Bollinger Bands is very useful for assessing trends. Closes outside the bands signal extreme territory and a potential reversal.
Combining Bollinger Bands with Other Indicators
Bollinger Bands become much more powerful when combined with complementary indicators. Let’s explore some potent combinations.
Bollinger Bands + RSI
The Relative Strength Index (RSI) measures the speed and magnitude of recent price changes to determine overbought or oversold conditions. RSI works perfectly with Bollinger Bands.
We can confirm overbought/oversold readings with the Upper/Lower Bands. Divergences between RSI and price action also become clearly visible with the Bollinger Bands on the chart.Overbought RSI diverging from price reaching the Lower Band
Bollinger Bands + MACD
The Moving Average Convergence Divergence (MACD) indicator spots changes in the strength, direction, and momentum of trends. MACD works well with Bollinger Bands for confirmation.
When price reaches the outer bands, it signals overextension. We can then check for bullish/bearish crosses on the MACD to anticipate mean reversion plays back inside the bands.Trading Strategies with Bollinger Bands on BetPro Exchange
Now let’s explore some trading tactics using the Bollinger Bands indicator on the BetPro Exchange platform.
Ride the Bands Strategy
This high probability strategy aims to capitalize on periods of expansion and contraction. Here are the rules:
- Go long when price pulls back to the Lower Band
- Close the long position when price touches the Middle Band
- Go short when price spikes up to the Upper Band
- Close the short position when price drops to the Middle Band
This allows traders to ride the volatility waves with a high probability of success. The key is confirmation from the bands expanding and contracting.
W-Bottoms at the Lower Band
The W-Bottom pattern forms when price sharply sells off and forms two bottoms on the Lower Bollinger Band, creating a W shape.A W-Bottom reversal pattern
W-Bottoms often indicate a strong reversal signal after overextension to the downside. We can capitalize on these high probability setups with calls as price bounces off the Lower Band.
M-Tops at the Upper Band
The M-Top pattern forms when price rallies sharply and forms two peaks on the Upper Bollinger Band, creating an M shape.An M-Top reversal pattern
M-Tops signal upcoming reversals after extreme overbought conditions. We can trade these patterns by shorting as price touches the Upper Band.<h2 style=”font-size:28px;”>Optimizing Bollinger Bands on BetPro Exchange</h2>
The default 20-period lookback window works well for most instruments. However, adjustments can improve performance.
Adaptive Bollinger Bands
Standard Bollinger Bands are based on fixed periods that don’t necessarily adapt well to changing volatility. Adaptive Bollinger Bands solve this issue.
The adaptive bands increase the lookback window during low volatility environments. This avoids premature squeeze signals. The window then decreases when volatility picks up to catch expansion moves early.
Using Higher Timeframes
Higher timeframes like the daily or weekly charts provide the most reliable Bollinger Band reversal signals. The larger the timeframe, the more significant the indicator breakouts.
Many professionals trade the daily chart for entries and the 5-minute chart for timing. This top-down approach takes advantage of reliable signals on the higher timeframe paired with precision entries on lower intervals.Bollinger Band Trading Tips
Here are some key trading tips when applying Bollinger Bands:
- Wait for Confirmation – Don’t assume the bands alone give sufficient confirmation. Look for supporting evidence from other indicators or patterns.
- Use Band Tagging – Enter when price tags or breaches the bands instead of just touching them. This filters out lower probability touches.
- Mind the Middle Band – Factor the 20-period SMA into your analysis. Trend direction and potential reversals become clear when incorporating the Middle Band.
- Consider Volume – Pay attention to volume on band tags. Increased selling volume on Upper Band tags or buying volume on Lower Band tags strengthens signal reliability.
- Go With the Larger Trend – Use a higher timeframe to define the major trend. Then look for band tag reversals in the direction of that trend for the highest probability setups.