Basic Bollinger Forex Strategy

Introduction

The Basic Bollinger strategy is meant to demonstrate one of the ways in which range bound market conditions can be traded in forex. The strategy uses the Bollinger bands as well as the Stochastics oscillator to pick out areas where the market is overbought or oversold.

In a market that is range-bound, there is more or less a well defined area of price support as well as an area of price resistance. However, the Bollinger bands are not made up of straight lines. By using the Stochastics oscillator and the behaviour of the price action around the lower and upper Bollinger bands, the trader can pick out areas where to buy at support or sell on resistance.

The Stochastics indicator is composed of two and an indicator window which is calibrated from 0 to 100. Values that are closer to 0 indicate oversold market conditions (good for buying) while values closer to 100 show overbought market conditions, which is good for selling.

Indicators
The indicators used for this strategy are as follows:

  1. Bollinger bands (default settings).
  2. Pivot point calculator.
  3. Stochastics oscillator (set to 10,3,3)

The Strategy

The strategy is built to pick out trading opportunities in a range-bound market. Ranging market conditions are typically seen in the days before a major news release is to hit the markets. During these times, most traders prefer not to commit to a direction, but rather prefer to wait on the sidelines until the market receives the news. When the news comes in with a deviation that is large enough from what is expected, traders will assume a market bias and trade along that bias. Therefore, the trader who will use the Basic Bollinger strategy should keep the economic news calendar very handy and make a note of when the major news is to be released. Using the volume indicator also helps. During the time the market is range-bound, trading volume is usually thin, but not entirely absent.

The trade strategy is quite simple. When the price action is at the lower end of the range, marked by the lower Bollinger band, the trader looks to see if the Stochastics oscillator is at an oversold level (i.e. less than 25). If the price is also located at a support pivot point, this adds more credence to the buy trade setup.

Similarly, when the price action is at the upper end of the market range (marked by the upper Bollinger band), the trader checks to see if the Stochastics oscillator is at an overbought level (i.e. lines of Stochastics oscillator crossing at >75). If the price action is at a resistance pivot area, this adds more credence to the trade. Let us take a look at the two sides of this strategy in action.

The signals are best derived from intraday charts such as the hourly chart.

1) Long Trade

For the long trade, we are looking for the following events to occur:

  1. The price action touches or cuts the lower Bollinger band.
  2. The Stochastics oscillator shows oversold market conditions (i.e. the lines of the indicator cross themselves at a level that is equal to, or less than 25 on the indicator window calibration).
  3. Price action is at a support level (S1, S2 or S3 as shown by the pivot point calculator).

When these signals occur, the trader should enter long at the open of the next candle.

Bsc_BollUp

Look at this hourly chart for the EURUSD. The BUY setup conditions are seen when the Bollinger bands are transversely oriented. The price action cut the lower Bollinger band at the same time that the Stochastics oscillator was <25 (brown circled areas). This area also happened to fall on the S2 support line. The BUY order is setup on the open of the next candle without delay. This move eventually moved 103 pips from entry point to the exit area at the S1 support line.

Stop Loss

The stop loss for this trade should be set below the S2 support line where the trade entry was made.

Take Profit

The Take Profit point is usually set to the upper end of the range, located at the upper Bollinger band. However, the S1 support line, which is the next resistance point from the S2 buy area, would prove to be a more valid exit area for this trade.

2) Short Trade

For the short trade, we are looking for the following events to occur:

  1. The price action touches or cuts the upper Bollinger band.
  2. The Stochastics oscillator shows overbought market conditions (i.e. the lines of the indicator cross themselves at a level that is equal to, or greater than 75 on the indicator window calibration).
  3. Price action is at a resistance level (R1, R2, central pivot or R3 as shown by the pivot point calculator).

When these signals occur, the trader should go short at the open of the next candle.

Bsc_BollDown

Look at this hourly chart for the EURUSD. The price action cuts the upper Bollinger band at the same time that the Stochastics oscillator was >75 (brown circled areas). Even though the price was not at the central pivot, the trade entry for the 1st trade is still valid for a short entry. The second trade setup perfectly at the central pivot. Short entry can be made there.

Stop Loss

The stop loss settings for the two trades are as shown on the chart. The first area is set above the central pivot, which even though short trade did not start from there, represents the strongest resistance to the trade.

Take Profit

The Take Profit point is usually set to the lower end of the range, located at the lower Bollinger band and also at the nearest support pivot where it occurs (2nd trade at S1).

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