HOW TO TRADE WITH BOLLINGER BAND INDICATOR

Bollinger Band indicator is named after its developer John Bollinger, who developed the indicator in 1980s. The indicator is classified as trend indicator or volatility indicator. In metatrader4 trading platform, the indicator is readily available for traders. This indicator is very widely used to trade financial instruments.This post does not explain the mathematical formulas behind this indicator rather the way to trade with this indicator.

Before explaining the way to trade with Bollinger Band technical indicator, let me first show how it looks like. Bollinger band technical indicator has an upper band, a middle band and a lower band. The bands are used to find the entry and exit signals. 

The Bollinger Band technical indicator can be successfully applied on the price chart of any time frames, but the longer time frame gives higher effectiveness of the indicator. Traders can also change the periods of the indicator to best fit it with their trading strategy. The default period for the Bollinger Band indicator is 20. 

There are three ways of interpreting Bollinger Band technical indicator to make profitable trades. 

Firstly, the upper band and lower band can be used to find entry and exit signals with Bollinger Band. The rule is simple, when the price touches the upper Bollinger Band a short order is placed, and when the price touches lower Bollinger band, a long order is placed. 

Second way to trade with Bollinger Band technical indicator is placing orders when the price breaks the middle band from up or down. A short entry is suggested when the price breaks the middle band from up, and a long entry is suggested when the price breaks the middle band from down. See the illustration below.

Thirdly, we can trade the Bollinger Band Squeezes, which appear when the upper band and lower band of Bollinger Band indicator come very closer to each other. The Bollinger Band squeezes can be traded in two different ways.

Firstly, as illustrated in the image below, two horizontal lines are drawn. The lines are drawn through the lows and highs of the price chart. A long entry is suggested when the upper line is broken by price, and a short entry is suggested when the lower line is broken by price.

Secondly, we can trade the Bollinger Band squeeze, when the price breaks the upper or lower band of the Bollinger Band. See the following illustration. When the upper band is broken by price, we can go long, and when the lower band is broken by price, we can go short.


When we are trading the Bollinger Band squeezes, we must put extra care on breakouts to make profitable trades. The lower or upper band has to be broken by the body of the candle, the breakouts by shadow of the candle are not considered as reliable breakouts.