Bollinger Trading – Strategy Basics

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Every beginner, before starting to trade, undergoes preparatory basic training and then chooses a trading method for himself.

At the same time, most of the strategies for beginners are simple techniques with clear and accessible tools that are freely available. Bollinger trading implies the use and application of a specialized technical indicator in trading. It is available on any brokerage site or in MetaTrader, as well as in all the most popular trading terminals.

Indicator Description

The technical instrument for trading is Bollinger Bands, which consist of three lines. The upper and lower lines form a range, and the middle Signal line is in the middle. To install this indicator on the chart, you do not need any effort and just click a couple of times with the mouse. Setting up the instrument will also not be difficult, even for beginners, since this indicator can be used with standard settings and you do not need to change anything in it. Although, if desired, you can change the color of the lines.

Basics of a trading strategy

To start working with this instrument, you need to set Bollinger bands on the chart. This indicator creates channels of the upper and lower boundaries, as well as the middle signal line.

Buy deal:
1. A buy deal is opened when market quotes begin to retreat from the lower border of the Bollinger Bands and go up.
2. Profit-taking is achieved when the price approaches the upper border of the indicator.
3. Partial fixation or safe method. Closing 50% of the deal at the intersection of market quotes and the middle signal line of the Bollinger indicator.
4. Additional method. Depending on the market situation, you can immediately place a take profit order with the required number of points.
5. Minimization of risks. Placement of a protective Stop Loss order.

A sell deal occurs similarly only in a mirror image. That is, when the market price reaches the upper boundary of the Bollinger Bands, a sell trade is opened and held depending on the required number of points.

Features of the Bollinger indicator

When the market is in a calm state, that is, in a consolidation zone or in a flat, the Bollinger bands are narrowed as much as possible. In practice, they form a narrow rectangle. As soon as a trend or Impulse begins, Bollinger Bands begin to diverge in different directions, forming a channel. 

Unlike the charting tools that traders use to build such channels, the Bollinger indicator does not have clear lines and looks like a wave. The maximum expansion between the borders of the instrument, in most cases, means that in the near future there will be a market reversal, and prices will go in the opposite direction.

There is one more feature of this tool. The fact is that market quotes do not always pass from one border to another during one impulse. Sometimes their movement can only be up to the signal line, and then prices reverse and go in the opposite direction. But in any case, after a while they still reach the opposite side.

Using indicators in trading

Before starting work, you must carefully familiarize yourself with the basic characteristics and rules of working with this tool. Using Bollinger Bands, you can not only open deals in the desired direction, but also place pending buy and sell orders or take profit fixing orders, as well as limiting losses – Stop Loss. In addition, using the indicator, you can calculate the possible profit.

Traders have developed a wide variety of trading strategies based on Bollinger Bands. To minimize financial risks and open trades with more accurate market entry, they use additional filters, that is, other tools. For example: 

• MADI;
• Moving averages;
• Parabolic;
• Stochastic.

The Alligator indicator is no less popular among traders, on the basis of which Bill Williams, one of the founders of trading in the financial markets, developed a special strategy.

Bill Williams: Alligator Strategy

In this technique, the author developed and used several technical indicators at once: Fractals, MFI, AO and the Alligator indicator itself . In addition, the Alligator strategy also involves the use of graphical constructions. They are needed to calculate the reversal bar and determine the Angulation. In addition, Bill Williams suggested using certain conditions for Money management. The full version of this strategy is described by him in The Three Wise Men.

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