John Bollinger’s indicator is a universal tool for market analysis that underlies a large number of existing strategies. It consists of three Moving Averages, which combine to build a dynamic price channel on the chart. Today we will take a look at a practical example of the most popular market analysis algorithm that relies on this indicator.
Information about the indicator
Bollinger Bands was presented in 1987. It was developed by John Bollinger, but the actual formula for this tool was created by Perry Kaufman. This indicator was originally used by financial analysts on major trading platforms. Then Bollinger Bands began to be actively used by traders of various levels. Today the indicator is in TOP-10 of the most popular technical analysis tools.
The interface includes 3 Simple Moving Averages. The middle line largely follows the price, and the two outer lines are plotted at a distance above and below the price. This results in a dynamic price channel on the chart, which goes wider or narrower depending on market activity. Most of the time, prices remain within the channel, only going outside during a trend reversal.
Setting up the trading terminal
Quotex is the choice of traders who prefer to save their time. A simple interface combined with useful features makes the platform appealing to traders of all levels. Setting up the indicator to fit the strategy’s requirements takes about 1 minute.
- Chart— candlestick type switched to a 5-second time interval (the lowest timeframe).
- Trade— the investment size based on the money management rules, expiration — 1 minute.
- Indicators— Bollinger Bands with standard period settings and the value of Standard deviation reduced to 1.
The versatility of the trading platform supports the use of different Moving Average types in Bollinger Bands. The default settings (Simple MA) are quite good for this strategy, but these settings can be changed for experiment’s sake. Quotex offers a practice trading mode, enabling you to make free trades using a virtual account you can reset. This opens up avenues for experiment.
Trading signals generated by the strategy
The key signal produced by Bollinger Bands is the reversal point after the price touches or breaks out of one of the wave boundaries. However, in addition, it shows several other types of information signals. These are channel width, breakthrough of the middle line, etc.
- up— the price bounces back from the lower boundary of Bollinger Bands;
- down— the price bounces back from the upper boundary of the channel.
Not every price reversal is a trigger to open a trade. It is only those corrections that occur after the previous breakthrough of the boundary that are valid. It is also important how fast the two lines are going apart. The wider the channel, the better, as this suggests market volatility.
When relying on this strategy in trading, you should understand that any indicator and ready-made market analysis algorithm cannot guarantee 100% performance. This is why due care should be taken when trading on a live account. It is important to follow the basic principle of money management, according to which the size of investment in one trade should not exceed 5% of your balance. When trading on a real deposit, you should be fully aware of the high financial risks that online trading involves.