Bollinger Trading Methods: Overview

Bollinger Bands Essentials Class 4
Bollinger Trading Methods

Overview:
• Play 1 - The Squeeze
• Play 2 - The Trend Trade
• Play 3 - Reversals
• Wrap up
Play 1 - The Squeeze

The Squeeze
• The most popular strategy
• Looks to enter a trend early on
• Anticipates high volatility (lots of price movement)
• Usually portends a new trend
• Beware of the head fake!
Remember!
• The “squeeze” is the setup
• The breakout is the trigger
• The trade can break either direction, you can not be biased
Squeeze Rules
• Look for tight bands
• Ideally lowest bandwidth readings of the last 6 months
• Enter the breakout after the first closing price outside the bands
• Set a stop based on parabolic
PAGE 1
Observations
• Occasionally there is not a closing price outside the bands: Watch for two successive days
of expansion and enter.
• The tighter the squeeze, usually the more explosive the move!
The Head Fake
• Watch for reversal candlestick patterns within 2-4 days
• If you see them, reverse position
• Target 1 is opposite side of the bands
• Often the trend will form in the opposite direction of the initial break
Squeeze
Squeeze
Close outside of bands
Squeeze
PAGE 2
Squeeze
Close outside of bands Bullish Engulfing

4 days later
Where’s The Target?

• Often with the squeeze you do not know the exact target
• You can estimate based on Support & Resistance
• ALWAYS be watching for a candlestick reversal signal
• Don’t be afraid to stop out
PAGE 3
Play 2 - The Trend Trade

The Trend Trade
• Similar to a squeeze play but without the squeeze
• Buying at the upper band into strength, selling at the lower band into weakness
• Best paired with additional indicators and/or analysis
Trend Trade Rules
Bullish:
• Look for stocks with strength (based on indicators, pattern breaks, volume, fundamentals)
• Buy on a touch of the upper band
• Set a stop with Parabolic
Bearish:
• Look for stocks with weakness (based on indicators, pattern breaks, volume,
fundamentals)
• Short on a touch of the lower band
• Set a stop with Parabolic
Observations
• You can buy/short retracements back to the middle band
• This method is very good when other confirmations are present
• A great technique for fundamental traders to use
• %B over .8 or below .2 is a good start
• Price pushes outside the band are continuation signals
• Price may walk the band for quite some time
PAGE 4
No Squeeze
Walking the band
Moving Average System

• Set stop over or under the middle band (20 SMA)
• This works great in a trend
• It is weak in a sideways move
• In a sideways move you have to go outside upper or lower band
Play 3 - Reversals
The Reversal Trade
• Anticipates trend reversals
• Provides the best opportunity for high risk/reward trades
• Sells weakness at upper band
• Buys strength at lower band
• Use oscillator(s) to help confirm 
PAGE 5
Reversal Rules
At tag of upper band:
• Look to short (bearish)
• %B should be diverging down
• Stochastics overbought crossing down
• Enter on first strongly bearish day
• Set stop based on Parabolic
At tag of lower band:
• Look to buy (bullish)
• %B should be diverging up
• Stochastics oversold crossing up
• Enter on first strongly bullish day
• Set stop based on Parabolic
Short Here
Stop: $71.14
Entry: $68.00
Target: $61.16
R:R = $6.84 : $3.18 Cover Here

Yes
PAGE 6
Short Here
No Yes Cover Here
Observations
• Reversal plays can be very profitable because of the quality risk/reward
• They require a bit of faith
• You should practice them a lot before placing real trades
Wrap UP
General Wrap Up
• Bollinger bands provide a relative definition of highs and lows
• Highs and lows are not absolutes and may lead to a continuation or a reversal
• Can be used to clarify patterns
• Built on Simple Moving Average
• Setting of 20, Std Dev of 2.0
• Average outlines the Int. trend
• Can be applied across multiple time frames
• Used as a relative framework
• 3 main plays:
PAGE 7
‣ Squeeze
‣ Trend
‣ Reversal
• %B & Bandwidth can help bring additional clarification
Additional Resources
• John Bollinger speaks from time to time
• His book
• BollingerOnBollingerBands.com
Homework
• Review Videos
• Back trade each method
• Start with one and really perfect that one first, then move on
• Virtual trade the systems first
• Be sure to write a plan and follow it!
PAGE 8

Bollinger Trading Methods: Overview

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What are the three main Bollinger Band trading methods discussed?

What indicators can help confirm reversals according to the material?

Bollinger Bands Essentials Class 4

Bollinger Trading Methods

Play 1 - The Squeeze

Close outside of bands

Close outside of bands

Close outside of bands

Close outside of bands Bullish Engulfing

Where’s The Target?

Play 2 - The Trend Trade

Walking the band

Moving Average System

R:R = $6.84 : $3.18 Cover Here

No Yes Cover Here

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