Bollinger Bands Trading Strategy – BRS, 3BB

Which Bollinger Bands Trading Strategy to follow? How to use the Bollinger Band Indicator? 

In the stock market, traders who continuously try to “sell the top” or “buy the bottom” using the Bollinger Bands indicator and are faced with an excruciating series of stop-outs. When the stock price touches upper band of Bollinger Bands, it doesn’t mean that it is always a sell signal and in the same way, when the stock price touches lower band of Bollinger Bands, it doesn’t mean that it is always a buy signal. Price often can and does “walk the band”.

Strategies are Bollinger which are based on oscillation from a baseline like median Bollinger are called Mean Reversion. Strategies to identify the excruciating series of stop-outs fall into breakout strategies. So riding a Bollinger Band is breakout strategy.

So Breakout and Mean Reversion Complement each other.However, it is time frame specific. What is a breakout in 1-minute time frame can fall into Mean Reversion in a higher time frame

So a useful way in trading with Bollinger Bands is to use them to identify trends. One standard cliché in trading is that prices range 80% of the time. Like many clichés, this one contains a good amount of truth since markets mostly consolidate as bulls and bear battle for supremacy.

Market trends are rare, which is why trading them is not nearly as easy as it seems. Looking at the price this way we can then define the trend as a deviation from the norm (range).

Let’s make the construction of an indicator close to Super trend with the help of Bollinger Bands. I want you to add another Bollinger Band in the top of the Bollinger Band you already have. Simply add one. But this time the settings will be

• Field – Close
• Period – 20
• Standard Deviations – 1
• Moving Average Type – Exponential
• Channel Fill – Yes

To avoid confusion and messiness, we make Channel Fill as No to previously plotted Bollinger Bands. Let’s open the Bank India May Futures in our trade setup. Also, colour 1 SD Bollinger as yellow to spot them better.

However, I am also using Moving Average Type as Simple for the 1 SD Bollinger to get a better exit. The 15 minutes time frame should look like –

Here is our Bollinger Bands Trading Strategy #1 –

BRS Strategy

To spot uptrend and trading opportunity for a buy signal,

• One green candle has its close outside 1 SD Bollinger.
• The next candle opens and closes above higher bands of 1 SD Bollinger.
• You enter at the “close” of the second green candle on the time of formation of the 3rd candle.
• You close when the candle touches the median of 1 SD Bollinger.

Here is our Bollinger Bands Trading Strategy #2 –

3BB Strategy

Here is another tricky condition to minimize loss (and well maximize profit):

• So far you have entered in the 3rd candle. If the candle ended as red after your entry. (You have entered the trade in the middle of 3rd candle formation right?)
• Here is what you do stay on the 4th candle – Immediately put 2 sell orders at the “low” of the last candle. Because it will not only exit you from the buy order; it will also open a sell position.

Because it now falls under 3BB strategy which I have already discussed earlier with live trades. As usual, it has a high probability of breaking the median Bollinger with 98.5% confidence.

If the second candle closes above the higher band of 2SD Bollinger, then there is a strong chance of a 3BB case. So I prefer the closure of the 2nd candle within the higher bands of 1 SD Bollinger and 2 SD Bollinger. By Closure, it means the open and close of the green candle lies within 1 SD Bollinger and 2 SD Bollinger.

Here are the first two trades in the given scrip using Bollinger Bands Trading Strategy –

Bought at 182.10; Sold at 185.30. Profit of 3.2 points
Bought at 188; Sold at 187.5. Loss of .5 points

Bank India is already a high beta script but still taking 15-minute time frame creates so much noise.

So the higher the time frame for this strategy; the better. Let’s name this strategy – Bollinger Ride Strategy (1SD – MA, 2SD – EMA)

Q. On 05/03 at 14:25 there is a huge red candle. Why didn’t we close our first trade there?

A. The red candle did not touch the median of 1 SD Bollinger though it touched the median of 2 SD Bollinger. (Refer above picture). EMA acts weird in volatile spike as it takes more weight of recently formed candlesticks. That’s why I rely on SMA as my exit strategy rather than EMA.

So you can also devise the vice versa method of spotting downtrend and generate a sell signal. However, if you do not consider the case of 3BB there are two trades –

Bought at 194.20 Sold Exit Complete at 190.1. Loss of 3.1 points
Sold at 188.05

As you see the first trade went to loss.

The following sell trade is as of now open. This strategy is extremely dangerous (so is all breakout strategies) in lower time frames as mean reversion happens most of the time. So you need to be highly alert if you choose a lower time frame to day trade.

Also, do note the 3rd candle (where we have entered) is a red candle confirming the settings of 3 BB strategy setup. If you follow that with price action method as stop loss (it is shown with a live example of Titan May Fut),

Then here is your trade –

Here we have sold at 194 and closed at 179.20 (Because as said earlier, in our day trader setup we close on 15:29)

Here is one more setup with SunTV May Futures. Here you can see why I call the name 3BB instead of 4BB and 5BB. Also, you can see the reason why we are not exiting based on price action unless the trade setup led us to a 3BB opportunity.