Trading Bollinger band bounces and retests in a ranging market. Just because price is range bound doesn’t mean you have to be without trading opportunities!
Trading an obvious trend is a lot more straightforward than trading when price is range bound, or appearing to move sideways. Many traders actually pass on the possibility of trading at all in a range bound market, standing aside until price once more takes on a definite trend. There are however strategies for coping with this much more restricted range of price movement. This free strategy is offered as one such approach.
The Bolly Band Bounce is based on the observed behaviour of price where the Bollinger bands form a kind of limit for short-term price movement. In this respect Bollinger bands are well named, in that they almost exhibit the elasticity characteristics of rubber bands. Price will approach an outer band, encounter resistance and snap back towards the opposite band.
One way to make use of this behaviour is to trade the bounces at the outer bands. This is not very effective in a sharply trending market, but when the market is in a range it can be very effective indeed for short-term scalps.
The first thing you must do when looking to trade this strategy is to determine that price is indeed in a range. There are many ways to do this but with Bollinger bands I find the simplest is to check if price is staying on one side or the other of the mid-band. If so, and price is making consistently lower lows then price is trending down. And the opposite of course applies for an uptrend: if price is staying above the mid-band and making consistently higher highs then we are in an uptrend.
The following illustration shows price in a down trend at the left of the screen turning into a trending market at the right:
Free Forex Strategy #3: Bollinger Bands Trending Turn to Ranging
The signal for a possible turn from trending market to ranging market is shown circled at the bottom of the chart: a tweezer bottom candlestick pattern has formed. If this has occurred in confluence with other factors such as support/resistance, round number, significant pivot level or Fibonacci retracement level, the signal is stronger. It may have been possible to take a trade at this level although personally I would prefer to wait for confirmation that price is indeed ranging by a turn at the opposite band. This is what we see in the second illustration, with three possible entries circled:
Free Forex Strategy #3: Bollinger Bands in Ranging Market
The confirmatory signals are, in the first two instances a bearish engulfing candlestick pattern, followed by a bullish engulfing pattern. The third entry is confirmed by a near perfect evening star.
Now we come to the mechanics of entry, stop loss and take profit limits. It’s critical to understand that this is essentially a scalping forex trading strategy. The idea is to enter immediately the signal is confirmed at market, with an aggressively tight stop loss, and take profit at the opposite Bollinger band.
Once the move is confirmed by price you should move the stop loss to breakeven as soon as possible. If you don’t do this you can be easily caught by price bouncing at the Bollinger mid-band and retracing to take out your stop. This would likely have happened in the first trade had you not immediately moved to breakeven once it was safe to do so.
Of course, you will have to use your own judgement as to when exactly it is safe to move to breakeven: do it too early and you will be stopped out by normal retracements even if price is moving in the direction you wished!
As a final note, this particular strategy is best traded in a very quiet market, with no fundamental news announcements etc imminent, on a pair that is not given to spiky price action. And it goes without saying that you should not enter trades based purely on the fact that price has reached an outer band. Look for a confluence at the outer band.
Confirmatory factors that may support an entry include:
- Support/Resistance Levels
- Round Numbers
- Fibonacci Levels
- Candlestick Patterns