How to Find Trade Setups with Bollinger Bands

How to Find Trade Setups with Bollinger Bands
How to Find Trade Setups with Bollinger Bands
How to Find Trade Setups with Bollinger Bands Getty Images

Sometimes finding reliable trade setups can seem daunting, but it doesn’t necessarily need to be that way.

In this post, we will take a closer look at identifying simple trade setups using Bollinger Bands®. If you pull up most charting platforms, including the Nadex platform, it’s very easy to plot Bollinger Bands on your charts.

Bollinger Bands are a simple, but powerful indicator that can easily help you find dynamic areas of support and resistance on the charts.

Investopedia defines Bollinger Bands this way:

“A Bollinger Band, developed and trademarked by famous technical trader John Bollinger, is plotted two standard deviations away from a simple moving average.”

Bollinger Bands have an upper band, a lower band and a center moving average. The upper band typically acts as resistance, while the lower band acts as support. The center moving average can also act as resistance or support within the channel.

When volatility is high, the bands widen, and when volatility is low, then the bands narrow.

How to Use Bollinger Bands to find trades setups:

How to Find Trade Setups with Bollinger Bands

This is a 15-Minute Nadex Chart of the US 500 Index

The “Bollinger Squeeze”

When volatility is low, markets go in to a congestion phase, and the Bollinger Bands will narrow. A Bollinger Squeeze is normally a signal that a breakout is imminent. Think of it like crimping a garden hose. The more you crimp it the faster the water comes out. Just like the garden hose, when the bands narrow significantly, there is likely to be a breakout in price movement. The breakout can move in either direction, so it is prudent to wait for confirmation of a breakout before you decide to enter a trade.

The “Bollinger Pierce”

If you see a candlestick break through the upper upper or lower band, it triggers a likely reversal in the market. Think of this like a rubber band around your wrist. The further you pull the rubber band away from your wrist, the faster and harder it snaps back. This can be a great opportunity for a short-term scalping of profits.

How to trade Bollinger bands with Nadex Binary Options and Spreads:

The “Bollinger Squeeze” 

Important: Wait for confirmation of the breakout direction

  • Binary Options: Once the direction of the breakout is confirmed, find the strike price that best suits your risk/reward tolerance. Keep an eye on the nearest time frame for expiry.
  • Nadex Spreads: Once the direction of the breakout is confirmed, I like to choose an ATM spread, where my mental stop loss is just outside the Bollinger Band and my profit target opportunity around 20 ticks or better.

The “Bollinger Pierce”

  • Binary Options: Once the upper or lower band is “pierced”, then I’m looking for the shortest expiry available to trade the reversal. Again, select the strike price that best suits your trading personality.
  • Nadex Spreads:  The “Bollinger Pierce” can be a good way to scalp some ticks or pips. If a candlestick closes significantly above the upper band or below the lower band, then it can trigger a reversal trade with a tight mental stop/loss. In the Chart above, four “Bollinger Pierce” opportunities were called out:
  1. March 8, 9:45 am EDT: The US 500 Index moved down 55 Ticks
  2. March 8, 3:30 pm EDT: The US 500 Index moved up 45 Ticks
  3. March 9, 3:45 am EDT: The US 500 Index moved down 60 Ticks
  4. March 9, 10:00 am EDT: The US 500 Index moved down 42 Ticks.

There were ample opportunities to capture a piece of each of those moves with Nadex spreads.

In the chart above, the plotting of the Stochastic Oscillator helped serve as confirmation that the markets were overbought or oversold.

Learning how to trade with Bollinger Bands can be helpful for both novice and experienced traders.

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