Like almost any indicator, Bollinger Bands® can be used to develop a trading strategy. The guidebook ETF Trading with Bollinger Bands demonstrates that Bollinger Bands can be applied to develop one of the most reliable strategies you’ll be able to trade.
ETF Trading with Bollinger Bands details precise entry and exit rules for high probability trading strategies based on this indicator. Variations of each strategy are explained so that you can customize the trading rule parameters to match your personal needs. Some traders prefer strategies that trade infrequently, for example, and varying the parameters can allow traders to meet this goal. Both long and short trading strategies are described in the guidebook. The table below shows that the strategy delivers consistent profits with an average holding period of just a few days.
The next table shows that five different variations of the trading strategy have win rates of more than 95%. It’s important to remember that many traders are content to record wins on less than 60% of their trades.
This strategy builds on the basic idea that lies beneath Bollinger Bands – a break of the Bands is an indication of unusual market activity. Under the rules for this strategy, a break of the Bands indicates that the market has become overbought (if the upper Band is broken) or oversold (when the lower Band is broken). Trades are then entered to benefit from the expected mean reversion that is commonly seen after prices move too far in a short period of time.
While it’s impossible to predict the exact timing of extreme market moves, it is possible for traders to know when extreme moves are likely to occur in some markets. For example, meetings of the Federal Reserve tend to create volatility in fixed income markets. Following a Bollinger Bands strategy could benefit from this relationship.