Trading on a trend is more honest than trading while the price is likely to move sideways or is in range-bound. Most of the traders ignore the possibility of trading in a range-bound market, waiting until the price goes on a definite trend to emerge. Even though it is not likely possible to trade as this holds a more restricted range of price fluctuation, several speculators successfully engage in this type of trading. Following a proper trading strategy, it is considered possible to trade on the market, even in the absence of a trend.
The Bolly Band Bounce Trade is one of such popular trading strategies. Many traders use this strategy when the currencies move in a range-bound market. The strategy hangs on around using the Bollinger Bands, a technical analysis tool, along with successful retests when the price moves within a particular range.
Usage of Bollinger Bands in the strategy
The Bollinger Bands include three different sets of lines - the upper band, the middle band (a 20-period moving average), and the lower band. The middle band serves as the base for the other two outer bands. The spacing between these three bands is determined by volatility. The widened band indicates high volatility, and the narrow band indicates that the volatility is low. Standard deviation is a mathematical measure that allows a comprehensive reflection of the price volatility.
These are mainly used while determining the overbought or oversold levels. It signals to sell when the price reaches the upper band and signals to buy when the price reaches the lower band. The possibility of indications in vice versa is also higher, and it is the risk involved while using the Bollinger Bands.
But some times, when the strong trends ride the bands, there can also be possibilities to buy when the price hits the lower band or sell when the price hits the upper band. These conditions may be quite risky. Even though the strategy requires only the usage of Bollinger bands, the traders can also use the RSI indicator along with the Bollinger bands if required, as it helps to confirm and trade the bounce of the bands.
How does the Bolly Band Bounce Strategy works?
The Bollinger Bands, in this strategy, act as robust support or resistance levels from which the possibility of the price to bounce off is higher. The traders can expect a crossover of the price action, and the outer band can act as both entry and exit points. Therefore, the usage of stop-losses and take profits while trading will help traders avoid potential losses. Once the stop-loss is set, it can later be adjusted based on the price movements in the right direction.
Let us now see how to use the Bolly Band Bounce strategy in a trade.
Choose the Bollinger Bands from the available indicators in the trading platform. Then, it is required to check and confirm that the price of the asset is within the range, and it is not trending. Here is how it can be confirmed:
When the price is consistently above or below the middle band, it can be considered trending, and it has the potential to make new highs or lows. When it is seen that the price bounces off any of the outer bands and then moves in the opposing direction hitting the other outer band, the price is then supposed to be ranging.
When the crossover between the price and one of the two outer bands occurs, the traders can open a long or short position depending on the predicted price direction.
However, a price that reaches any of the outer bands cannot be considered as a trading signal. Any reliable entry requires a confirmation that can be done through candlestick patterns, Fibonacci retracement, support and resistance levels, etc.
The Bolly Band Bounce Trade strategy is one of the most flexible types of strategies that can be used in any technical analysis. It can also be easily incorporated into any of the existing strategies for better results. The strategy is strongly recommended when the market is silent, and there are no significant announcements made. It can also compliment price action trading. Nevertheless, it is a fact that no strategy can be 100% accurate all the time on processing any trades.