Bollinger Bands is a great trading tool that's suitable for many trading styles. This article reveals how to best use Bollinger Bands in swing trading.

Bollinger Bands for Swing Trading

Each trader must have a specific trading style that they prefer. One of the most popular strategies is called swing trading. The goal is to make as many gains as possible from the market swings by using short-term trends. If done consistently, it can compound into considerable returns over time.

Swing traders generally use technical analysis to look for opportunities, but sometimes, they also use fundamental analysis to further support their trading plans. In this case, there are various different tools and indicators to use in a swing trading strategy, and one of them is Bollinger Bands.

 

Why Are Bollinger Bands Suitable for Swing Trading Strategies?

Swing trading is a trading strategy that aims to capture shorter-term price movements within a larger trend. The goal is to profit from the oscillations that occur as the market moves between support and resistance levels. Unlike day trading, swing trading allows for a longer time horizon and involves overnight positions.

Bollinger Bands are well-suited for swing trading strategies due to the following reasons:

  1. Volatility assessment
    Bollinger Bands visually depict price volatility, expanding during periods of high volatility and contracting during low volatility. Swing traders can utilize this information to evaluate potential price swings and adapt their strategies accordingly.

  2. Support and resistance levels
    The upper and lower bands of Bollinger Bands serve as dynamic support and resistance levels. When the price reaches the upper band, it may indicate overbought conditions and potential reversals.  Conversely, when the price reaches the lower band, it may signal oversold conditions and potential price rebounds.

  3. Trend identification
    Swing traders aim to capture price swings within an overarching trend. Bollinger Bands assist in identifying the prevailing trend by observing the slope and positioning of the bands. In an uptrend, the price often stays close to the upper band, while in a downtrend, it tends to stick near the lower band. This information helps swing traders align their trades with the underlying trend.

  4. Entry and exit signals
    Bollinger Bands provide potential signals for entry and exit points in swing trading. For instance, a price crossover above the upper band may indicate a potential sell or exit point, while a crossover below the lower band may suggest a possible buy or entry point. These crossovers can be combined with other indicators or price patterns to enhance the accuracy of trading signals.

  5. Stop loss placement
    Bollinger Bands aid in determining appropriate levels for stop loss orders. Swing traders can position their stop loss orders outside the bands to account for potential price reversals or breakouts beyond the bands.

 

How Does the Strategy Work?

In this strategy, we're not only using Bollinger Bands but also Intraday Intensity, which is a volume-based technical indicator to know how intraday highs and lows move alongside the market's volume compared to the previous day's closing price. The value of this indicator is shown in a vertical range that starts from 1 (the high of the range) to 0 (the middle of the range) and -1 (the low end of the range).

Here are the steps to use Bollinger Bands for swing trading:

 

1. Run the Intraday Intensity Indicator as an Oscillator

When used as an oscillator, the intraday intensity can work both as a divergence indicator and an overbought-oversold indicator. In the most extreme overbought market, the oscillator will show the number +1, and in the most oversold market, the oscillator will show -1. The midpoint is 0. Therefore, you tend to see positive values between 0 and +1 when there's a bullish market, and you will see negative values between 0 and -1 when there's a bearish market. Divergence, on the other hand, is rarer to see but usually provides more accurate signals.

 

2. Trade Reversals Only

In this strategy, you want to look for opportunities from market reversals and place an order after a strong reversal happens. So that means, open a sell position when the price touches the upper Bollinger band and the intraday intensity is showing an overbought signal. Using the same concept, open a buy position when the price touches the lower Bollinger and the intraday intensity is showing an oversold signal.

Another thing to keep an eye on is reversal candlestick patterns. You can use this as an additional confirmation on top of the Bollinger Bands and the intraday intensity signals. These patterns will reduce the probability of getting false signals that could lead you to failures and losses. In that case, here are some patterns to look for:

  • Engulfing candlesticks
  • Inside day candlesticks
  • Morning/evening star patterns
  • Dark cloud cover/piercing patterns

 

3. Long Trade Setup

Here's how the long trade setup goes:

  • Wait until the price hits the lower Bollinger Bands. Ideally, we would want to see it accompanied by a bullish reversal pattern, such as morning star, bullish engulfing, piercing line, or inside day.
  • At the same time, make sure that the intraday intensity shows a bullish divergence (the indicator is showing higher lows when the price is showing lower lows).
  • Open a buy order once the reversal candlestick pattern setup is fully formed. Place the order at the next candle that follows the pattern.
  • Set a stop loss below the low of the candlestick pattern and a take profit either at the middle or upper band. If the initial resistance was at the upper band, then it's more likely to be an excellent spot to place the profit target. Don't forget to use a trailing stop once the price goes beyond the middle Bollinger band.

Take a look at the example below.

Long trade setup

Based on the illustration above, we can see that there was a divergence area where the price was showing lower lows but the intraday intensity was forming higher lows. To further confirm the signal, there was a bullish engulfing pattern. The buy order was opened once the pattern was completed.

 

4. Short Trade Setup

The short trade setup basically uses the same concept but the opposite of the long trade setup.

  • Wait until the price hits the upper Bollinger band and form a bearish reversal pattern. Some of the possible patterns are bearish engulfing, evening star, dark cloud cover, and inside day.
  • At the same time, make sure that the intraday intensity indicator is showing a bearish divergence,
  • Open a sell order once the reversal candlestick pattern setup is complete. Place the order at the next open candle that follows the reversal pattern.
  • Place a stop loss above the high of the candlestick pattern and a take profit either at the middle or the lower band. If the previous support was at the lower band, then it's an excellent spot to place the profit target. Don't forget to trail the stop losses once the price moves past the middle band.

Below is an example of how it looks like:

Short trade setup

In the EUR/USD chart above, we can see how the price hits the upper band of Bollinger Bands before falling significantly. It also happens that the price action indicates a bearish engulfing pattern, which is a pretty strong bearish reversal signal. The short opportunity is further supported by the preceding signal from a bearish divergence between the price and intraday intensity indicator.

 

Conclusion

From the strategy, we've learned that Bollinger Bands can make a good tool for swing trading as long as you know how to use it. We can see that it's possible to find good trade opportunities and generate a profit out of them. However, keep in mind that while the setup is pretty simple, but in reality, it may be a bit difficult to identify the perfect entry and exit positions since there are several signals that you need to keep track of at once.

Apart from that, you also need to check if the other aspects such as currency pairs and time frames work well with this strategy. After all, we must remember that not all strategy works well in any situation. With that being said, the best way to start is by testing out the system on a demo account first.