Recalling the Bollinger Bands

Bollinger Bands is an indicator known to many traders, Bollinger Bands as its name implies that creates a band around the price range. And the width of the ribbon will depend on the volatility of the price range at the present time. Bollinger Band is contracted or stretched depending on the average volatility of the price.

In other words, Bollinger Bands will help you read the price volatility of the current moment. Price interactions with Bollinger Bands will give you valuable information about the direction of the market. 

How to read price action with Bollinger Bands

We will have 3 important cases where price interacts with Bollinger Bands, including:

  • Candles with long tails attach to the Bollinger Bands and reverse.
  • Price interacts with Bollinger Bands and gradually opens the band.
  • The candle formed completely outside the Bollinger Bands.

Now take a closer look at each of these cases.

Case 1: candles with long tails attach to Bollinger Bands and reverse.

Sideways market. Prices continued to move sideways for many days.

This market type is ideal for scalpers who often expect low returns, prefer quick entry and exit.

The method here is that the trader will use a limit order when the price hits the upper or lower bands of the Bollinger bands. Use a sell limit if the price hits the upper band and buy the limit if the price hits the lower band.

You can increase the winning rate of these trades by waiting for the price to hit support or resistance (increasing the rate of a reversal instead of just using Bollinger bands alone).

Case 2: Price interacts with Bollinger Bands and gradually opens the band.

The price continues to push the band as a sign of a strong market trend. See the chart below.

To trade price action in this case, the most common way is to use a buy/sell stop when the price closes above/below the Bollinger Bands. However, do you need to determine in advance whether the market has exited the sideways environment? Has the market broken out successfully or just broke out ?.

Why do we ask the above questions? Because price action traders only use Bollinger Bands as a support factor, not a determinant. In many cases, the price breaks out of the sideways, breaks out of resistance/support, price forms a breakout failure, and traps all traders who like to trade the breakout. Therefore, you need to be careful when observing that the price falls into this situation.

Case 3: Candle formed completely outside the Bollinger Bands.

This is the opposite of case 2 but is easy to confuse. You need to pay close attention. Bollinger Bands are designed to cover the price under normal conditions. That means when the price closes outside the Bollinger Bands, there will be 2 cases: the price has formed a strong trend or the price has gone too far (oversold or overbought).

Distinguishing this from case 2 is not easy if you use only Bollinger Bands and how the price closes outside the Bollinger zone. To determine this case 3, I often observe closely the candles formed outside the Bollinger Bands.

Is it forming pinbar, spinning top candles? Is it hampered by any resistance/support nearby? And finally, the price has been suddenly bounced off the Bollinger Bands. This price behavior is almost identical to the "dying candle", the price bounces very strongly and will also reverse very quickly.