Improved Bollinger Band Bounce Set ups

Improved Bollinger Band bounce method can help you filter the trades using making the popular Bollinger Band Bounce trading set up into a really powerful trading strategy.

Bollinger Bands are used for identifying both trends as well as volatility. There are many trading strategies based around Bollinger Bands, but they all fall into either walking the bands methods, which is a trend following strategy or a Bollinger Band bounce set up, which trades the pullbacks. Bollinger band bounce set ups work on the principle that when prices bounce off either the upper or the lower Bollinger Bands, prices tend to retrace or move in the opposite direction. But it begs the question as to what happens when a Bollinger Band Bounce set up fails?

Of course, using stops here to cut the losers quickly might be an option. But what if there was a filter to pick out only the best set ups thus increasing the probability of trading the Bollinger Band bounce better? In this article, we explore a rather simple method to pick out trades based on the Bollinger Band bounce. The general conviction with this small but important improvement is to look for support and resistance levels by looking at past price history.

Read more about Bollinger bands here.

Bollinger Band Bounce with Support and Resistance

Using the default settings of 20, 2 the Bollinger Bands are applied on the chart. To identify only the important support and resistance levels, we follow these simple rules.

  1. Look for a peak or a trough where price interacts with the upper or lower Bollinger bands and call them key pivot low or key pivot high (Note that this is just a naming convention and in reality we look for higher close and lower close and not high or low of price)
  2. Within the previous 10 – 15 bars and the preceding 10 – 15 bars, there should be no new highs or lows
  3. Using the ‘Ray’ tool, plot these pivot highs and lows
  4. Once the levels are plotted, it’s now time to wait for price action to unfold

When prices react to these pivots high or low points, a Bollinger Band bounce at these key support and resistance levels can increase the probability of your trade set ups.

Improve Bollinger Band Bounce Set ups

In the first chart, we identify a key pivot level. Here, the high formed was stalled with the upper Bollinger Band and looking to the left and right, we don’t see any other highs, making this an important price level. After quite some time, price eventually breaks above this key pivot high and soon falls back and tests this level.

Bollinger Band Bounce – Spotting the right set ups
Bollinger Band Bounce – Spotting the right set ups

An important point to bear in mind here is that there are two places where prices interact with this level. The first one, marked ‘Incorrect set up’ is because although price dipped to this key pivot level, price action remained well within the lower Bollinger band.

On the other hand, the Bollinger Band bounce marked ‘Correct set up‘ shows prices breaking out of the lower Bollinger Band.

Buying here and targeting the recent pivot high offered a really strong trade set up with little pullbacks in the process.

The next chart below shows a sell set up. Look carefully at the key pivot low that was selected. Price breaks this low initially but soon comes back to test this level, and is also validated by the Bollinger Band bounce. The short position would then be targeted to the most recent low which was reached.

Improved Bollinger Band Bounce Strategy
Improved Bollinger Band Bounce Strategy

How long are the levels valid for?

The key pivot highs and lows are valid for as long until price interacts with them. In certain cases, some of these key pivot levels remain untested for a long period of time. Buying or selling at these levels (with confirmation of a Bollinger Band Bounce) can greatly help you to spot trading set ups that would be otherwise be missed. This is best illustrated in the next two charts.

Key pivot low identified – March 21st 2016
Key pivot low identified – March 21st 2016
9 days later, price interacts with the pivot low, making a Bollinger Band bounce
9 days later, price interacts with the pivot low, making a Bollinger Band bounce

As you can see from the above examples, the Bollinger Band bounce method can be greatly improved by using this simple technique of trading at the key pivot high or low levels. While it looks easy to trade, note that you need to have a lot of patience waiting for the right set ups to be formed.

It is up to the trader to define their own target levels as the improved Bollinger Band bounce technique helps you in entering a market with low risk.