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This is part of FXEmpire’s continuing series of special features on trader education, and provides a solid basis for understanding double Bollinger bands. For more detailed coverage, and examples, see Chapter 8 of the book, The Sensible Guide To Forex.
Here’s a brief illustrated summary of the 4 rules for using double Bollinger bands (DBBs). Like any technical indicator signals, these should be confirmed by your preferred technical and fundamental indicators. For background information, full details and illustrations of each rule, see our articles Part 1 and Part 2. For a video introduction to double Bollinger®bands based on my book, see fxacademy’s free course here.
RULE 1: Go Short & Stay Short, When Price Is In Or Below The DBB “Sell Zone”
When price is in the sell zone, downward momentum is strong enough for the odds to be in favor of continued downtrend. This rule applied from the week of September 7th (arrow A) until the week of December 14th (arrow B) in Chart 1 below.
CHART 1: S&P 500 Weekly Chart Sept. 7th – Dec. 14th 2008 – SELL ZONE Framed By Arrows A and B Within Highlighted Area
01 Feb. 25 20.10
RULE 2: Go Long & Stay Long, When Price Is In Or Above The DBB “Buy Zone”
When price is in the buy zone, upward momentum is strong enough for the odds to be in favor of continued downtrend. The rule applied for most of the period between arrows 1-4 in Chart 2 below.
CHART 2: S&P 500 Weekly Chart March 8 2009 – April 4, 2010 BUY ZONE Framed By Arrows 1 To 4 Within Highlighted Area
Highlighted area: April 19, 2009 – 31 January 2010
06 Mar. 24 12.45
RULE 3: Don’t Trade Trends Based On DBBs When Price Is In The Neutral Zone
When price is in the middle, neutral zone, momentum isn’t strong enough for trend trading in your current time frame.
- Trend Traders Should Cease Trading: Wait for the next entry into the buy or sell zone when momentum is strong enough.
- Switch To Range-Trading Strategies: As we discuss in our book, in these situations it’s especially helpful to also look at the range using a shorter term time frame, typically a fourth or fifth of your normal time frame. For example, those using weekly charts consult daily charts, and those using daily charts consult 4-6 hour charts.
For example, see the period between (but not including) arrows 5 to 8 in Chart 3 below.
Chart 3: S&P 500 Weekly Chart, January 31, 2010 – February 20, 2011 NEUTRAL ZONE is area between (but not including) Arrows 5 To 8 Within Highlighted Area
Red Arrows Highlighting weekly candles of April 25 (5), 2010, May 16, (6), August 1 (7), Sept. 12 2010 (8)
12 Feb. 19 18.25
Rule 4: Minimizing Risk: Enter Longs At Bottom Of Buy Zone, Shorts At Top Of Sell Zone, Or Enter In Stages
The purpose of this rule is to minimize your risk of buying at the high or selling at the low.
For example, enter near or at the red Bollinger bands of the Buy and Sell Zones shown in Chart 4 below.
CHART 4: S&P 500 Weekly Chart August 17, 2008 to October 3 2010
14 Feb. 19 19.58
In other words, arrow A indicates a low risk point to enter a new short position. Arrows 1, 2, 3, show low risk entry points for long positions. See Part 2 for details.
The Big Qualification To Rule 4
Do not attempt ‘bargain hunting’ if your full range of fundamental and technical evidence suggests that the move isn’t just a technical pullback but instead the start of a trend reversal. If so, then avoid the trade, or take only partial positions until the trend resumes, and use conservative stop losses to minimize damage if in fact the trend you’re playing breaks down.
For example, in Chart 4 above, this bargain hunting strategy worked for taking new long positions around the times of arrows 1, 2, and 3, but not around the times of arrows 4 and 5.
For full explanations of double Bollinger ®bands and their uses, see Part 1 and Part 2. For a video introduction to double Bollinger ®bands, see fxacademy.com’s course, based on the material from my book, here.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.