Adjust Bollinger Bands for scalping with a length of 10 and a standard deviation of 1.5. Then apply a Stochastic Oscillator as a confirmator.
Invented by John Bollinger in the 1980s, Bollinger Bands are one of the most easily accessible technical indicators on trading platforms. It consists of middle bands, upper bands, and lower bands, which are calculated based on a simple moving average plus/minus a certain standard deviation. The question then is, how to use Bollinger Bands for scalping?
Trading platforms typically carry Bollinger Bands with standard settings of 20 for periods and 2 for standard deviations. However, we can modify the Bollinger Bands parameters to match our respective trading styles. Here are some examples:
- Bollinger Bands with a 10-period moving average and 1.5 standard deviations may be suitable for scalping.
- Bollinger Bands with a 20-period moving average and 2 standard deviations may be suitable for day trading.
- Bollinger Bands with a 50-period moving average and 3 standard deviations may be suitable for medium-term swing trading.
- Bollinger Bands with a 200-period moving average and 3 standard deviations may be suitable for longer-term position trading.
Still, these are mere rough calculations, and you can actually make further adjustments to create your own successful strategy.
It's important to note that lower Bollinger Band settings will produce a greater number of trading signals, but they will also produce more fake signals because price movement will leave the bands more frequently. In contrast, Bollinger Bands with standard deviations higher than 2 will create more accurate --but far fewer-- trading signals.
By adjusting the Bollinger Bands settings, you can read the market better and find optimal signals in accordance with the timeframe you use. Afterward, we can go on to identify the signals.
Helpful Tricks on Using Bollinger Bands for Scalping
Bollinger Bands are a versatile technical indicator with three main functions. It can be used as a dynamic support and resistance level, as a measure of volatility on the market, as well as to detect overbought and oversold levels.
When prices set foot in the upper band, it means they have reached an overbought level. The upper band itself acts as dynamic resistance. Traders usually steer clear of entering long positions at these levels.
When prices step at the lower band, it means they have reached an oversold level. The lower band itself acts as dynamic support. Traders usually steer clear of entering short positions at these levels.
In a ranging market without a distinct trend, prices tend to stay between the upper and lower bands. Nevertheless, you should not use both bands as trading signals to enter positions in the opposite direction.
Note that prices can still move higher in an overbought area. When prices meet the upper band, it merely means that there are fewer chances for further increases. Prices can also move lower in an oversold area.
Most beginners usually enter a buy position once prices meet the upper band, then sell it once prices meet the lower band. However, such a simplistic approach is prone to fake signals and will only work on a ranging (sideways) market. You should avoid it in a trending market.
The distance between the upper and lower bands is a measure of volatility in the market. The narrower the band, the smaller the volatility. The wider the band, the higher the volatility.
When the wide channel between the upper and lower bands gets narrower, it means the market may settle into a sideways environment in the near future. However, you should be cautious when the narrow channel gets narrower, because it may be a precursor to a trending market. See the dynamics on the chart below:
So, does it mean we can only use Bollinger Bands in a ranging market? It may be yes, or it may be no.
Some traders use Bollinger Bands in a ranging market only, then change to other indicators in a trending market. Others prefer to pair Bollinger Bands with one momentum oscillator-type technical indicator, such as Stochastics Oscillator or the Relative Strength Index (RSI), to achieve better results in both markets.
Pairing Stochastics and Bollinger Bands for Scalping
Let's say you have adjusted the Bollinger Bands' settings with a length of 10 and a standard deviation of 1.5. Then you apply a Stochastics Oscillator with default settings to an M5 chart. You will see something like this:
Look at how often prices flow along the upper and lower bands. You will quickly be confused if you are fixated on using both bands as triggers to buy or sell. As such, you should use Stochastics as confirmators and apply the following rules:
- Enter a buy order when prices near the lower band and Stochastic moves upward from the oversold area to somewhere above the 20.0 threshold. Place a stop loss below the lower band, and take profit when prices reach the upper band.
- Enter a sell order when prices are near the upper band and Stochastic moves downward from the overbought area to somewhere below the 80.0 threshold. Place a stop loss above the upper band, and take profit when prices reach the lower band.
Based on this simple rule, you can get at least six buy and sell signals, as seen below:
All of them with profits between 5-10 pips per trade. You can also optimize results by using Trailing Stops.
Quite easy, don't you think?
Feel free to try it out on a demo account and transfer it into real trading whenever you are ready. You can also explore a combination between Bollinger Bands and RSI to improve your trading experience.