Bollinger Band Turn Trade

[onetarmizi]

We have long been taught that to be a successful trader, your objective should be to buy low and sell high or buy high and sell higher (and vice versa for shorts). Different strategies approach this most basic definition of speculation in various ways. Trend traders look to buy strength on the breakout and sell weakness on the breakdown. Good trend traders can make great sums of money in the long term with just a few big winners. However, most find applying trend trading far more difficult than the theory behind it. Simply stated, the human brain is not wired to trade trends.

For example, buying the breakout in GBP/USD at 1.8000 (after it had bottomed at 1.7229 34 weeks earlier) and holding until 1.9000 sounds great, but human tendency makes it difficult to buy something at what is perceived as a high price (such as 1.8000). Furthermore, false breakouts will whipsaw a trader out of many trades - it simply isn't an efficient way to trade. On the other hand, traders that attempt to pick bottoms and tops usually get blown out of the water because they either do not have a method or they fail to follow their method - the end result is akin to attempting to stop a freight train by standing in front of it. Traditional trend trading (buying and selling breakouts) seems far too challenging from a psychological point of view, but for a novice trader, picking tops and bottoms at the same time is simply dangerous. What we need is a relative definition of high and low and a filter to help identify proper top and bottom trades. In this article we'll take a look at the inside day Bollinger band, which can help objectively measure what is high and low.

Combining Inside Days with Bollinger Bands
Prices at the upper Bollinger band are considered high and prices at the lower Bollinger band are considered low. However, just because prices have hit the upper Bollinger does not necessarily mean that it is a good time to sell. Strong trends will 'ride' these bands and wipe out any trader attempting to buy the 'low' prices in a downtrend or sell the 'high' prices in an uptrend. Therefore, just buying at the lower band and selling at the upper band is out of the question. By definition, price makes new highs in an uptrend and new lows in a downtrend, which means that they will naturally be hitting the bands. With this information in mind, our filter will require that buy signals occur only if the candle following the one that hits the Bollinger band does not make a new high or low. This type of candle is commonly known as an inside day. The best time frames to look for the inside days are daily charts, but this strategy can also be used on hourly, weekly and monthly charts. Combining inside days with Bollinger bands increases the likelihood that we are only picking a top or bottom after prices have hit extreme levels. As a rule of thumb, the longer the time frame, the rarer the trade will be, but the signal will also be more significant.

Candlesticks and their respective patterns illustrate the psychology of the market at a particular point in time. Specifically, the inside candle represents a period of contracted volatility. If, in an uptrend, volatility begins to slow and the market fails to make a new high (as illustrated by the inside candle), then we can deduce that strength is waning and that the chance for a reversal exists. When combined with a Bollinger band, we ensure that we are trading a reversal only by either selling high prices (higher Bollinger band) or buying low prices (lower Bollinger band). In this way, we trade for the big move; not necessarily selling the low tick or buying the bottom tick but definitely buying near the relative bottom and selling near the relative top. The key is confirmation.

Since Bollinger bands typically use a length of 20, we can employ a 20-period simple moving average (SMA) as a target to take profit. The 20-period SMA will trade equidistant from the upper and lower Bollinger bands. To catch large moves, allow the pair to trade through the 20-period SMA and then trail your stop with the moving average, only closing trades on the close after the pair crosses the SMA again. The examples below will shed light on this process.

Four Guidelines
We have four guidelines. We'll call these guidelines (rather than rules) because this is a strategy that involves discretion. The guidelines present a trade setup that may or may not result in a trade.

For longs:

1. Look for the currency pair to hit or come very close to hitting the lower Bollinger.

2. Wait for next candle and make sure that the next candle's low is greater than or equal to the previous candle's low and that the high is also less than or equal to the previous period's high. If so, go long at the open of the third candle.

3. The initial stop is placed a few pips below the previous candle's low.

4. Trail stop on a closing basis with the 20-period SMA.

For shorts:

1. Look for the currency pair to hit or come very close to hitting the upper Bollinger.

2. Wait for next candle and make sure that the next candle's high is less than or equal to the previous candle's high and that the low is also greater than or equal to the previous period's low. If so, go short at the open of the third candle.

3. The initial stop is placed a few pips above the previous candle's high.

4. Trail stop on a closing basis with the 20-period SMA.

Now let's explore some examples:

The first example is a short EUR/USD trade on daily charts. In Figure 1, we see that the price hits the upper Bollinger, we wait for an inside day to form where the high and low of the candle is engulfed by the previous candle. Once we see that, we enter short on the following candle at 1.2144 on March 21, 2006. We remain in the position and trail our stop on a closing basis by the 20-period SMA. The trade is eventually closed on March 24, 2006, at 1.2035 for a gain of 109 pips.

Figure 1 - Short EUR/USD trade on daily charts

The next example is a short GBP/USD trade. In Figure 2 we see the same scenario as the EUR/USD trade but this is far more profitable opportunity. As illustrated in Figure 2, our short trade is initiated at 1.7714 on October 31, 2005. The position is then covered on December 1, 2005 at 1.7310 for a 404 pip profit.

Figure 2 - Short GBP/USD trade

On the long side, we have USD/CAD that gave us an inside day Bollinger band signal on March 6, 2006. We went long at 1.1364. The uptrend remained intact for one month, allowing us to exit the trade at 1.1618 on April 5, 2006 for a 254 pip profit.

Figure 3 - USD/CAD

You may also notice from our examples above that our exit could be greatly improved by taking profit at the other Bollinger band. For example, on the USD/CAD trade in Figure 3, we could have taken profit on March 20 at the upper Bollinger band at 1.1680. The same can be said for the GBP/USD trade in Figure 2 - we could have covered our short position on November 16 at 1.7163 at the lower Bollinger band. In order to exit at favorable prices, a good tip is to trade two lots and take profit on one lot at the opposite Bollinger band. Trail the stop on the other lot with the 20-period SMA (as originally described). This way, you consistently book profits at favorable prices but give yourself the chance to profit from a truly remarkable move.

 

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Longer Term Charts
The inside day Bollinger band setup can also be used to identify major turns on weekly or even monthly charts for the longer-term position trader. The following examples show signals of our setup at major tops in GBP/USD (weekly chart) in Figure 4, a major bottom in EUR/GBP (weekly chart) in Figure 5 as well as well as a buy signal that indicated an all-time low in EUR/USD back in late 2000 on the monthly chart shown in Figure 6, and finally a USD/JPY sell signal in Figure 7 that was triggered in February 2002 at 133.36 on a monthly chart. In the last example, the pair closed at 119.49 just four months later!

Figure 4 - GBP/USD

Figure 5 - EUR/GBP

Figure 6 - EUR/USD

Figure 7 - USD/JPY

Benefits
There are many benefits to the inside day Bollinger band strategy. The most obvious is its simplicity. Creating a trading strategy is not rocket science, but those that treat it as such usually end up frustrated and confused and - worse still - with a losing trading record. We can easily measure risk with this strategy and place stops appropriately. In other words, we have distinct points of reference (the inside day's high and low) from which to enter the trade and place stops. The setup is dynamic, meaning that it works on all time frames. Even a short-term day trader could use it on an hourly chart. However, the shorter the time frame, the less reliable the signal. Remember that candlesticks and their patterns shine light on the psychology of the market. An hourly chart encompasses a smaller amount of market data than a daily chart. As a result, an hourly chart is not as true an indication of mass psychology as a daily chart.

Conclusion
This setup is just that - a setup. The trade should be managed according to your risk parameters and your trading style. Some may prefer to sell on a retrace after a short signal occurs, while others may prefer to sell a break of a daily low after a short signal. As we mentioned above, alter the size of the trade and the exit strategy. For example, trade multiple lots (if account size permits) and take profit on one lot at the 20 SMA, take profit on another lot at the opposite Bollinger band, and trail another lot(s) with the 20 SMA. Regardless of how you choose to implement this strategy, keep in mind that the FX market is an extremely trending market, which makes it even more important for range traders to get confirmation before trying to pick tops and bottoms. Combining inside days with Bollinger bands is a simple way of waiting for confirmation before taking the trade.

by Jamie Saettele.

Jamie Saettele is the senior currency strategist at Forex Capital Markets LLC in New York and author of "Sentiment in the Forex Market" (Wiley Trading). He has contributed to Technical Analysis of Stocks and Commodities magazine, SFO Magazine and Futures Magazine. Saettele is an independent trader employing a discretionary approach to the FX market.

 

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2. Bollinger Band To Gauge Trends

Bollinger bands are one of the most popular technical indicators for traders in any financial market - stocks, bonds or foreign exchange (FX). Many traders use them primarily to determine overbought and oversold levels, selling when price touches the upper Bollinger band and buying when it hits the lower Bollinger band. In range-bound markets, this technique works well, as prices travel between the two bands like balls bouncing off the walls of a racquetball court.

Yet as John Bollinger was first to acknowledge, "tags of the bands are just that - tags, not signals. A tag of the upper Bollinger band is not in and of itself a sell signal. A tag of the lower Bollinger band is not in and of itself a buy signal". Price often can and does "walk the band". In those markets, traders who continuously try to "sell the top" or "buy the bottom" are faced with an excruciating series of stop-outs or worse, an ever-mounting floating loss as price moves further and further away from the original entry.

Perhaps a more useful way to trade with Bollinger bands is to use them to gauge trends. To understand why Bollinger bands may be a good tool for this task we first need to ask - what is a trend?

Trend as Deviance
One standard cliché in trading is that prices range 80% of the time. Like many clichés this one contains a good amount of truth since markets mostly consolidate as bulls and bears battle for supremacy. Market trends are rare, which is why trading them is not nearly as easy as it seems. Looking at price this way we can then define trend as deviation from the norm (range).

The Bollinger band formula consists of the following:
BOLU = Upper Bollinger Band
BOLD = Lower Bollinger Band
n = Smoothing Period
m = Number of Standard Deviations (SD)
SD = Standard Deviation over Last n Periods Typical Price (TP) = (HI + LO + CL) / 3
BOLU = MA(TP, n) + m * SD[TP, n]
BOLD = MA(TP, n) - m * SD[TP, n]

At the core, Bollinger bands measure deviation. This is the reason why they can be very helpful in diagnosing trend. By generating two sets of Bollinger bands - one set using the parameter of "1 standard deviation" and the other using the typical setting of "2 standard deviation" - we can look at price in a whole new way.

In the chart below we see that whenever price channels between the upper Bollinger bands +1 SD and +2 SD away from mean, the trend is up; therefore, we can define that channel as the "buy zone". Conversely, if price channels within Bollinger bands –1 SD and –2 SD, it is in the "sell zone". Finally, if price meanders between +1 SD band and –1 SD band, it is essentially in a neutral state, and we can say that it's in "no man's land".

One of the other great advantages of Bollinger bands is that they adapt dynamically to price expanding and contracting as volatility increases and decreases. Therefore, the bands naturally widen and narrow in sync with price action, creating a very accurate trending envelope.

A Tool for Trend Traders and Faders
Having established the basic rules for Bollinger band "bands", we can now demonstrate how this technical tool can be used by both trend traders who seek to exploit momentum and fade traders who like to profit from trend exhaustion. Returning back to the AUD/USD chart just above, we can see how trend traders would position long once price entered the "buy zone". They would then be able to stay in trend as the Bollinger band "bands" encapsulate most of the price action of the massive up-move.

What would be a logical stop-out point? The answer is different for each individual trader, but one reasonable possibility would be to close the long trade if the candle turned red and more than 75% of its body were below the "buy zone". Using the 75% rule is obvious since at that point price clearly falls out of trend, but why insist that the candle be red? The reason for the second condition is to prevent the trend trader from being "wiggled out" of a trend by a quick probative move to the downside that snaps back to the "buy zone" at the end of the trading period. Note how in the following chart the trader is able to stay with the move for most of the uptrend, exiting only when price starts to consolidate at the top of the new range.

Bollinger band "bands" can also be a valuable tool for traders who like to exploit trend exhaustion by picking the turn in price. Note, however, that counter-trend trading requires far larger margins of error as trends will often make several attempts at continuation before capitulating.

In the chart below, we see that a fade trader using Bollinger band "bands" will be able to diagnose quickly the first hint of trend weakness. Having seen prices fall out of the trend channel, the fader may decide to make classic use of Bollinger bands by shorting the next tag of the upper Bollinger band. But where to place the stop? Putting it just above the swing high will practically assure the trader of a stop-out as price will often make many probative forays to the top of the range, with buyers trying to extend the trend. Here is where the volatility property of Bollinger bands becomes an enormous benefit to the trader. By measuring the width of the "no man's land" area, which is simply the range of +1 to –1 SD from the mean, the trader can create a quick and very effective projection zone which will prevent him or her from being stopped out on market noise and yet protect his or her capital if trend truly regains its momentum.

Conclusion
As one the most popular technical-analysis indicators, Bollinger bands have become crucial to many technically oriented traders. By extending their functionality through the use of Bollinger band "bands", traders can achieve a greater level of analytical sophistication using this simple and elegant tool for both trending and fading strategies.

by Boris Schlossberg.

Boris Schlossberg serves as director of currency research at GFT Forex. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of "Technical Analysis of the Currency Market" and the co-author of "Millionaire Traders" with Kathy Lien.

 

[onetarmizi]

A good video and simple presentation about Bollinger Bands.


http://www.youtube.com/watch?v=PONc9GkzFrA

 

[ahib0205]

terbaiklah basic BB!



BB amat berguna untuk penentuan polar pergerakan harga

gelombang yang besar terhasil dari gelombang yang kecil

oleh sebab itu jika tengok pada bentuk BB ada kembangggggg dan ada kuncuppppp dan ada juga sekata

itu membawa maksud market uptrend, downtrend dan keseimbangan

saya pun masih cuba untuk memahami BB ni lebih dekat lagi (

ada orang makan bertahun baru dapat merasai nikmat BB #:-S

selamat bertrading semua!