Hello guys, today we're going to talk about one of the most important indicators and the
most popular Volatility indicator, the Bollinger Bands.
Bollinger Bands is an envelope type of indicator and that's the reason why you can get entry
and exit signals from Bollinger Bands and it's also useful for trading any type of market
scenario.
In today's video I am going to talk about what bollinger bands are and I am going to
give you some tips on how to trade them properly.
Bollinger bands are created by plotting a moving average and then adding and subtracting
standard deviations to the moving average.
Standard deviation is a statistical term that tells you how much the price is moving away
from the moving average.
According to the theory of normal distribution adding and subtracting 1 standard deviation
to the moving average will contain about 68% of the prices.
Adding and subtracting 2 standard deviations to the moving average will contain around
95% of the prices, and with 3 standard deviations we have 98% of the prices.
So let's go back to cTrader where we will show you exactly how bollinger bands look.
We see here that I have drawn a bollinger bands indicator with the standard parameters.
The indicator plots 3 lines.
A moving average, an upper and a lower band.
The upper band is calculated by adding standard deviations to the moving average, and the
lower band is calculated by subtracting standard deviations from the moving average.
The amount of standard deviations that you add or subtract to the moving average, determines
how wide the channel created by the upper and the lower band will be.
Here we have added 2 standard deviations so we see how much the bands go apart, but if
we modify the indicator and we make the standard deviations parameter to 3 standard deviations,
we're going to see how much they widen.
And then again if we make it 4, we're going to see that they're going to be more wide.
The periods of the indicator determine how many periods will be used when calculating
the moving average, so this parameter the periods here, do exactly that.
Bollinger bands is one of those indicators where you can play a lot with the settings,
depending on what you want to do, for example if I want to concentrate on range trading,
I can plot a 100 period 3 deviations moving average, bollinger bands, you're going to
see how different the indicator is, and how better I can range trade now.
If you want to trend trade you can use the default settings, and so on.
Now I will show you generally how you can read volatility using standard settings (2,20)
of bollinger bands, so let's go back to 20 and 2.
Let's zoom in.
First we notice that the price is indeed inside the bollinger bands, most of the time, as
we can see in the chart.
Then we're going to notice that the price is constantly touching the upper or lower
bollinger band, that is called a "tag".
So we say that the price is tagging the upper or lower band.
Tagging the bands are not trading signals with default settings, and you cannot just
go long when the price is touching the upper band and go short when the price is touching
the lower band.
Next thing we notice is that the bands are constantly expanding and contracting.
If we see here we see in this place the bands are contracting and then they are expanding.
They contract when the price is moving slowly, and they expand when the price is moving rapidly
and there is high volatility.
Remember when we said that the band contain about 95% of the prices inside?
They have to expand very rapidly when the price moves faster, in order so that they
keep containing 95% of the prices.
We also see here that when the price is trending, it's walking one of the bands so it's constantly
touching, it's constantly tagging the lower band and it's not touching at all the upper
band.
Now that we have this information I am going to explain to you the different ways you can
use bollinger bands in your trading.
Bollinger bands can be traded both in range trade and breakout scenarios.
If you are not familiar with those terms you can watch the corresponding video.
So let's go to cTrader where I am going to show you the first way to use bollinger bands
in your trading which is identifying M tops and M bottoms.
We have plotted here a standard bollinger bands, standard periods (20,2), and the M
tops and M bottoms is actually another way of measuring divergence using bollinger bands.
M top or M bottom means that we have two consecutive high or low swings, but however the first
one touches the upper or lower band, and the second one does not touch the band.
In the case of high swings it's a short signals and in case of low swings it's a long signal.
It does not matter if one of the highs is higher than the other, the second high can
be higher than the first, but it still not touch the band.
So we have here a EURUSD one hour chart, with standard bollinger bands and let me show you
an example of M bottom.
We see here that the price is walking the band, and it's touching the band and then
we have another low that is lower than the previous low, but however it's not touching
the band.
So around this spot that you have a clear swing, you can actually enter long because
this is a long signal, and you're going to be successful.
The opposite case is here, where you have an M that is on the long side.
So we have a high swing that is touching and following the band, and then we have another
one that fails to touch the band, and this is another way of measuring divergence I guess
and you can go short around here that is confirmed that we have a swing that didn't touch the
band, and you're going to be successful again.
So during a trend the concept of bollinger bands changes completely.
What you want to do during a trend is enter when the price reaches the moving average,
or enter when the price reaches the low bollinger band.
You also should have a big target and close your position when you have an M signal, in
trend trading the Ms are very often, happen very often, in this case for example we can
see here the M that we have shown before, you see this high failed to reach the band,
so we can enter here at the moving average of low band and exit here with a good profit.
If you are in a down trend you're going to do the reverse thing, you're going to enter
also on the moving average, and you're going to close on an M bottom.
The next important concept that I want to explain when trend trading is the changes
in volatility, so we're going to use the same example here.
In a trend there are always changes in volatility from low to high as we see here, you see here
in this spot we have high volatility, which is measured by a big distance between 2 bollinger
bands, and low volatility spots like here, where the price is not moving a lot, or here
where we have consolidation.
What you do with bollinger bands in the parts of the trend that consolidate, is trade a
breakout with the direction of a trend.
This is called trading the squeeze.
However you need to understand that this is essentially breakout trading and you must
do it in proper context.
In this case the context is the trend that is developing, and in another set up the context
might be news that are coming out or some reason that the market is consolidating and
exploding in some direction.
If you just randomly trade all the squeezes that you find on the chart you're going to
be unsuccessful, because you are going to get a lot of failed signals.
In this chart we see a couple of squeezes, like this one and this one, both of them are
going to be successful if you trade them.
Another way of trading the bollinger bands, last way that I am going to show you that
is not something you will find usually on the internet, is trading them with high periods.
It can be traded as a mean reverse strategy.
What you do is plot bollinger bands, indicator with high periods and high standard deviations,
like here we have plotted with a 100 period moving average and 3 standard deviations.
What you do is go long when the price is touching the lower band, and go short when the price
is touching the higher band.
This is more successful however if you do it, not if you do it during a trend, or at
least I should say that during a trend, it's better if you go only with the direction of
the trend so you do not get the opposite signals.
But still its a good, pretty solid strategy to use even during a trend, just go only long.
However if the trend is very strong, instead of entering in the low bollinger band, you
can be entering on the moving average, you're still going to be getting very good targets.
In spots that you do not have lower lows and higher highs, like this spot for example,
where the price is not trading heavily, you're going to be pretty successful if you trade
this strategy, like here, here, these are all good signals.
The last concept that I want to talk about is the bollinger bands width.
By measuring the bollinger bands width you can filter or get important information about
your signals.
I would like to outline a great cTrader feature here, you can search custom indicators that
are located in our database in cTrader developer's network, inside cTrader.
Let me show you how it's done because bollinger bands width is not one the standard indicators
you will find in cTrader.
You go here to indicators and you search "bollinger bands".
The application is going to automatically search cTDN and it's going to find the indicator
bollinger bands width that I want to show you now, so I just click that, then a new
cTDN page will open and have bollinger bands width here.
So what we do is we press the download button, and you just run the indicator that you have
downloaded.
Then you're going to get a message to install it, you press "yes" and it's installed.
You don't even need to restart the platform, you can go to "custom" and you can find the
bollinger bands width indicator, you see it here.
So let's plot it.
Let's remove the bollinger bands indicator here, the bollinger bands width indicator
measures the distance between the upper and lower band in pips.
The formula is actually upper band minus lower band divided by the middle band.
What I can do is put the default parameters, and understand when there is a squeeze and
when there is normal movement and where is a chance for a trend so, I can set these levels
by using lines here.
By looking at the indicator it's really easy to understand.
I can put this line here, and I can put another line here, and we have two lines here.
So what I did, ok these lines are of course just and indication, you're going to put your
own lines but what I am doing is, I am identifying on the indicator all the places that there
is a squeeze, so let's try to plot a bollinger bands indicator with default settings.
We see here, the spots below the first line are the spots that there is a squeeze, see
here there is a squeeze.
All the spots that are below the second line are the spots that, we don't have a trend
we have normal market movement, because there is no big volatility, and when the price spikes
above this line, which is this spot exactly here you see?
then we have a chance for a trend.
See here also?
Here we have a chance for a trend , here we have a chance for a trend, it's pretty reliable.
So I can use bollinger bands width to understand, if the market is trending or ranging or if
I have a squeeze.
In this video I explained to you the bollinger bands indicator and I have shown you the most
popular ways of trading it when trend, ranging, and also I have shown you how to trade it
with high parameters and with low parameters, and how to identify the M tops and bottoms.
In the next of the videos we're going to talk about oscillators, and also we're going to
talk about other volatility indicators like the average true range.
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Thanks for watching.