Disclaimer: I have never used this forex strategy, I’m just sharing it here because you may find it useful.
In general, here is how the Bollinger Band Forex Trading Strategy works:
- when price is touching the outer lines of the bollinger band, it may that may be a sign that the market may reverse, so you look for a reversal candlestick signals to trade.
- for example, if the price has been going up and touches the upper bollinger band line, you go short(sell). Do the opposite when price touches the lower bollinger band line.
- The middle bollinger band line can be used as a reference line to move a profitable trade to breakeven or also can be used as a profit target.
- The stochastic indicator is used as a filter for the trades.
Suitable Timeframes: 1hr, 4hr and Daily
Currency Pairs: Any
Forex Indicators:Bollinger Band (settings:period 20, standard deviation 2) & stochastic indicator (settings 13,5,5)
You must be able to spot popular reversal candlestick patterns likes, dojis, inside bars, bearish and bullish haramis, shotting star, hammer etc. This enhances your trade entry.
BOLLINGER BAND FOREX TRADING STRATEGY RULES
(1) price must be touching the lower bollinger band line (and may close below it too)
(2)look at the stochastic indicator to see if the two lines are below 20(oversold condition).
(3)then look at the closing candlestick to identify if its a good bullish reversal candlestick? What you need to look for a bullish reversal candlesticks like, hammer, inside bar(or bullish harami formation).
(4) Once you see a suitable bullish reversal candlestick pattern, play a pending buy stop order 2-5pips above the high of that bullish reversal candlestick pattern.
(5)Place your stop loss 10-20pips below the low of the bullish reversal candlestick. You have to make sure your stop loss is not to close, otherwise you may get stopped out prematurely.
(1) Do the exact opposite of the buy rules.
(2) Look for bearish reversal candlestick patterns like shooting star, bearish harami(inside bar), dojis.
TAKE PROFIT TARGETS AND OPTIONS
For take profit target options, here are couple of ideas:
- the middle bollinger band line can be used as your take profit target. When price reaches it, you exit your profitable trade.
- the middle bollinger band line can also be used as a “Take Profit Target Level 1″ meaning can close half (or whatever amount) of your trade when price reaches this and you keep the rest running until price reaches the “Take Profit Target Level 2″ which would be the Upper Bollinger Band Line for a buy trade and Lower bollinger band line for a sell trade.
- Or you forget about the two options above and do this only: aim to exit your trade when price reaching the upper bollinger band line for a buy trade so when price touches(reaches) this line, you exit immediately. You can do the opposite for a sell trade…aim for the lower bollinger band line and when price reaches it, you exit with your profit immediately.
- Here’s an idea: move stop loss to break-even when price touches the middle bollinger band line.
- But you need to be aware this may not be suitable on certain times because the price may be too close and this may cause you to get stopped out only to find out later the price moves as expected. So at least try to keep 15-30 pips distance when move your stop loss to break-even.
DISADVANTAGES OF THE BOLLINGER BAND FOREX TRADING STRATEGY
- In a strong trending market, prices will be hugging the upper/lower bollinger band lines and you may find out you will get stopped out frequently if you are looking for reversals of that trend.
- Do not enter using market orders. It is preferable to use sell stop or buy stop orders based on reversal candlestick patterns you see.
ADVANTAGES OF THE BOLLINGER BAND FOREX TRADING STRATEGY
- this is one forex trading strategy that can sometimes pick top and bottoms…which means you sell at the very top of a price swing and you buy at the very bottom of a price swing.
- If that happens, your risk:reward ratio of this trading strategy will be very good and you can make a lot of profitable pips as a result.
- you can further enhance this strategy further by using price action trading by the use of reversal candlestick patterns to time your trade entry as well.
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