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STRATEGY SUBMISSION: Bollinger Band Divergence Strategy

 
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Bill K

STRATEGY SUBMISSION: Bollinger Band Divergence Strategy

Here is a nice visual strategy that works on all pairs and in any timeframe.  It uses only the Bollinger Bands; I use a 2, 16 setting.  This is a variant of the Bollinger Band Double Top/Bottom trade.  The use of the Bollinger Band in this strategy graphically identifies divergence between Price and the Bollinger Bands.  A bar will close outside the Bollinger Bands, showing extreme price movement.  If Price pulls back/retraces and then pushes on to make a new High (or Low) and Price stays INSIDE the Bollinger Band, it is easy to see divergence between Price and the Bands, usually resulting in a significant movement in the other direction.  Screen shots attached clarify this strategy.

SETUP:

Long Trade:

  • Look for a bar (or bars) to strongly penetrate and then close OUTSIDE the Lower Bollinger Band.
  • Look for Price to retrace and then push down to make a lower Low (lower than the Low of the bar closing OUTSIDE the Lower Band).  HOWEVER, if there is bullish divergence, the lower Low will remain INSIDE the Lower Bollinger Band.
  • Draw a trendline from the top of the recent swing High down to the top of the bar AFTER the lowest Low.

Short Trade:

  • Look for a bar (or bars) to strongly penetrate and then close OUTSIDE the Upper Bollinger Band.
  • Look for Price to pullback and then push up to make a higher High (higher than the High of the bar closing OUTSIDE the Upper Band).  HOWEVER, if there is bearish divergence, the higher High will remain INSIDE the Upper Bollinger Band.
  • Draw a trendline from the bottom of the recent swing Low up to the bottom of the bar AFTER the higher High.

TRIGGER:

  • Go long when the trendline is broken to the upside
  • Go short when the trendline is broken to the downside

TRADE MANAGEMENT:

  • TP should be the opposite Bollinger Band
  • SL should initially be the most recent High (for short trades) or most recent Low (for longs), but trailed as Price moves in the direction of the trade.

IMPORTANT NOTES:

  • You must trade within a single Bollinger Band expansion cycle.  You cannot use a penetrating/closing outside High/Low and then get your lower Low/higher High inside the band in another expansion ‘bubble’ after a contraction (i.e. Bollinger Band Squeeze).
  • The new lower Low (or higher High) may pierce the band, but it cannot close OUTSIDE the band to be a valid trade setup.

The attached PDF shows examples of 2 open trades (H4 EURJPY and H4 EURUSD) and some examples of other successful trades, in the D1, H4 and M15 timeframes, long and short.

Check out the open trade examples and watch to see how they play out!

AttachmentSize
Bollinger Band Divergence Strategy_2-8-2017.pdf630.34 KB
Wed, 02/08/2017 - 12:53pm
 
waterball1973

Thank you for sharing, will try your strategy.

 
Norma Jenner

Sweet. wd and beautifully presented

 
leomog0209

Very good post. Thank you.

 
steveorr

Interesting approach using the Bollinger Bands.

 
nicholastrisstan

Very nice approach...Thanks Bill.

Regards

 
Snowboarder

I use bollinger bands now, but never thought to add a trendline, a very nice and clear trigger. Thanks for sharing!!!!

 
allday

Great detail...very informative. THanks!

 
gerard.e.beaubrun

Thank you so much for this. I"m looking forward to evaluating and trying this strategy

 
JimmyDean

Looks solid, thanks.!

 
spiralmo

Thanks Bill, I like it, and will give it a try!

 
sungwie

very good! Excellent...
How often do you find this kind of setup opportunities??
Thanks for sharing....

 
Bill K

Depends on your timeframe and pairs, Sungwie. I trade the M15 during the sessions - a scan of the 9 major pairs will identify 3-4 setups almost every day during the US and Asian sessions. I use the H4 trading overnight, and there is usually at least 1 to set each night. I also found trading this strategy has really helped me trade the entire trend.

I used to be constantly getting into 'reversals' that failed or getting out of winning trend trades too early. Understanding this strategy has really, really helped me be a better trend trader. Here is why:

1. These trades almost always originate with a strong breakout. Previously, if I missed the breakout, I thought the trade was over for me, and I'd move to another pair. Understanding this strategy helps me see that even if I missed the breakout, I can trade it up and down because I can better understand price action at the BBs. When the breakout eases up after a sharp move I've noticed that the dominant DMI will cross under the still rising ADX (setting = 13) when price is done walking the B Bands. This is a signal to catch a short counter-trend trade it back to the BB mid line with reasonable probability it will pullback/retrace.

2. Understanding this strategy also means that when price moves back to the BB mid line after a pierce of the BB, it is likely a trend continuation trade. I will take 2 lots on a reversal signal at the BB mid - especially if price pierced the BB but didn't close outside of it - knowing that there is a good chance price will continue to match or create a new high/low. I take 1 position off at a h/l match and hold one for a push to a new h/l. If the move is still volatile and pushed outside the BB and closes OUTSIDE, I know there may be one more swing counter-trend to the BB mid and then back to a new h/l closing INSIDE the BB - the setup for this trade. Knowing that either keeps me in the trend trade or lets me scalp another counter-trend to the BB mid and then a 2 lot trip back down to the h/l and maybe even a new h/l as it sets up for this strategy.

3. Then I get to trade this strategy. Making it my 3rd or 4th high probability trade of the breakout!!! Now I can actually catch my reversals - certainly a higher probability than trading the first pull back from the BBs - and ride it 2 lots, 1 to the BB mid and holding 1 to the opposite BB.

So, it has really helped me better see the market price action, using only an ADX/DMI indicator to see when price is legitimately done walking the bands. I can take multiple integrated trades and counter trades knowing this strategy is coming, and its really helped my profitability. It has really helped me identify my SL and TP levels too - right at the swing h/l and the BB midline, cutting down on the frustrating times I've been stopped out and then the trade runs in my original direction.

Hope it can help you too!

 
kayodemiza1

Thanks,

Already put it into practice

 
AARON_H

Very nice, great post.

 
kayodemiza1

Patient is the key

 
mkoningmd

Thanks for sharing your strategy Bill. The close outside the band shows extreme momentum and the subsequent close inside the band shows a decrease in the momentum from the previous extreme.

Very nice!

 
CirrusSageRL

Try Alignment Trading candlestick patterns! What a punch. I use M5 and M1...when both show same direction time to order. Happy scalping!

 
Rookie

This is a great topic one because I use Bollinger bands and two because I didn't understand how to identify and use a regular or hidden divergence. I think I was absent that day,

However my friends over at Babypips have a great little section on Trading Divergences,
Think you know it all?
start here with the short quiz https://www.babypips.com/learn/forex/summary-of-divergences
then the lessons start here... :) just saying.
https://www.babypips.com/learn/forex/high-school#trading-divergences

For another look at the application, Norma has a great thread started with the CCI my second tool of choice.
CCI Divergence - Jenner's Divergence Corollary
https://apiaryfund.com/forum/cci-divergence-jenners-divergence-corollary-0
Thanks, Norma.

So if nothing else now you know why folks are talking about double tops and double bottoms...

 
daudiflumence

The bolingo bang strategy can also be used

 
mbhendrix

Thanks for posting.

 
adi.goka

Thanks Guys - I use Bollinger bands for SL and TP estimations - but never for a trigger - i will try that

 
mondoterra111

This has been very helpful, thanks.

 
TGI

Be careful when the market and band trend together higher or lower. Tight stops help here..

 
mackmack

I plan to give this a try. Great thread, very helpful.

 
pmuthuraman

Looks like a great strategy. Will check it out soon. Thanks for sharing