The Bollinger Squeeze Breakout Forex Strategy

Introduction to the Bollinger Squeeze Breakout System

There are occasions when the Bollinger band indicator is heavily contracted or squeezed, usually as a result of very little market volatility which causes the bands of the Bollinger indicator to be placed tightly together. Following the period of squeeze, price action will experience an explosive breakout as market news is released and causes traders who were hitherto on the sidelines to enter the market in one direction or the other. So Bollinger bands expand during high volatility periods and contract during periods of low market volatility.

The strategy was initially created for use in the stock markets, but it has also been modified for use in the forex market. It has been optimized for use on the 30-minute time frame and higher time frames.

Indicators
This strategy makes use of 2 indicators:

  1. The Bollinger band indicator.
  2. The Keltner channels (a custom indicator). Several versions of this indicator exist. However, you should use the one derived from the Average True Range. Furthermore, the centre band in the Keltner channel indicator must correspond to that of the Bollinger band, which is the 20-day moving average.
  3. Volume indicator, which is used to confirm that market interest in the asset is increasing, leading to increased volatility which precedes the breakout.

The Strategy

The complication with this strategy is that whenever there is a Bollinger band squeeze, it can be hard to tell whether this squeeze will precipitate a breakout, or a prolonged period where prices will be range-bound. How narrow should a squeeze be before it can be deemed to precipitate a breakout? This is where the Keltner channels come in.

The Keltner channel is added to the chart and this is what brings the differentiation in which squeeze should be considered for the trade. You should only trade the squeeze that conforms to the following parameters:

  1. Only trade with a squeeze condition where the lower and upper Bollinger bands have entered into the boundaries of the upper and lower bands of the Keltner channels. When this has happened, then know for sure that the Bollinger bands are in an ideal squeeze situation, with very low volatility.
  2. Following the situation in (a), once the upper and lower Bollinger bands have started to emerge out of the boundaries of the Keltner channels, then the breakout has started to occur. This is a sign that volatility has started to increase.
  3. Increase in trade volume, shown by rising amplitude of the volumes indicator, is a sign that the breakout is about to occur.

With these points in mind, let us now indicate how the two trade situations should be traded.

Long Trade

For the long trade, we wait for the Bollinger bands to invade the Keltner bands, and then re-emerge from the Keltner bands, As soon as the price action is noticed to start to tilt upwards, the long trade is initiated soon after the upper Bollinger band has emerged from the upper Keltner band. This is shown in the snapshot below:

Squeeze_long

In this snapshot, what we have done is to first load the template file so as to load the indicators on the chart. Then we look out for the area where the upper Bollinger band is re-emerging from the upper Keltner band. A price action candle actually opens on the upper Keltner band. This is where the trader should enter long. We also see that the volume indicator used for this trade, the customized squeeze breakout volume indicator, has started to show an increase in amplitude, evidenced by the green colour change with increasing bars. This trade would have delivered 204 pips from entry to TP.

Stop Loss

The stop loss is placed a few pips below the upper Keltner band.

Take Profit

The Take Profit point is set to where the price action hits a peak, usually after cutting the upper Bollinger band.

Short Trade

For the short trade, we wait for the Bollinger bands to enter within the boundaries of the Keltner bands, and then re-emerge from the Keltner bands. As soon as the price action starts to tilt downwards, the short trade is initiated as soon as the lower Bollinger band has emerged from the lower Keltner band. This is shown in the snapshot below:

Squeeze_short

In this snapshot, we again load the template file so that the indicators will appear on the chart exactly as the initiators of this strategy have described it. Then we look out for the area where the lower Bollinger band is seen to be re-emerging from the lower Keltner band. A long red (bearish) candle opens soon, followed by another long price action candle which actually opens on the lower Keltner band. The open of this second candle, which rests on the white-coloured lower Keltner band, is where the trader should enter short. We also see that the volume indicator used for this trade, the customized squeeze breakout volume indicator, has started to show an increase in amplitude, evidenced by the green colour change with increasing bars. This trade, taken on the one hour chart, would have delivered a good number pips from entry to TP.

Stop Loss

The stop loss is placed a few pips above the lower Keltner band.

Take Profit

The Take Profit point is set to where the price action hits an area of support, especially if the lower Bollinger band has been broken by the price action.

It should be noted that more pips are gained when the 4hour and daily chart are used for analysis. For information as to how to get the indicators and template file for this strategy, contact the administrator.

One Response to “The Bollinger Squeeze Breakout Forex Strategy”

  1. hi,
    would you send me the template and indicators for this subject http://www.investoo.com/bollinger-squeeze-breakout/
    thx

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