Bollinger Bands Squeeze or Bollinger Squeeze is one of my most favorite Forex trading strategies because it is so easy to follow. It is more a mechanical trading strategy rather than technical. It is a great trading strategy for novice traders who don’t have enough knowledge and experience in locating strong trade setups. If you are new to Forex trading, or any kinds of trading, and you like to start making profit easier and faster, then Bollinger Bands Squeeze is the best trading strategy for you. Therefore, make sure to follow this short article to the end.
After candlesticks, Bollinger Bands is my most favorite indicator because it is the best indicator to show the strength of the trends and ups and downs of the sideways markets. Bollinger Bands’ upper and lower bands get too close to each other and form a Bollinger Bands Squeeze pattern, when the market becomes so slow, volume goes down and the price moves sideways.
What Is Bollinger Bands Squeeze?
Bollinger Bands Squeeze is a great trading strategy to ride a part of the trend or a strong movement to make some money. When a strong movement starts, markets usually take some rest at the middle of the way. That is the time that the price starts moving sideways and Bollinger Bands Squeeze pattern forms. In this pattern, Bollinger upper and lower bands become so close and move sideways while they are parallel with each other.
Once you have these two, I mean a strong movement and then a Bollinger Bands Squeeze pattern formed on the chart, you must wait for the sideways market breakout to continue the strong movement. For example, when the strong movement is upward, then you should wait for a resistance breakout. You need to locate a resistance line above the Bollinger Bands Squeeze pattern, which is indeed the resistance of the sideways market, and then you should wait for the resistance breakout. Once a candlestick closes above the resistance, you have a long trade setup or buy signal formed on the chart.
It is the same when the strong movement is downward, and then a Bollinger Bands Squeeze pattern forms. In this case, you must locate the sideways market support line and wait for the support breakout. If any of the candlesticks closes below the support line, you will have a short trade setup or sell signal.
This was the general description of this trading strategy. Now, I show you some examples to help you understand the system in the best possible way. Please make sure to read the article entirely 🙂
Long Trade Setups
Please follow the screenshot below to learn how a long trade setup forms, based on the Bollinger Bands Squeeze trading strategy.
As I explained above, to have a long trade setup or buy signal, first you must wait for an upward movement. Then, you must wait for the market to become slow and start moving sideways to form a Bollinger Bands Squeeze pattern. You must locate the resistance line (or level) of the sideways market, and then you must wait for a resistance breakout. Once one of the candlesticks closes above the resistance line/level, you will have a long trade setup and you can buy at the open of the next candlestick.
Stop Loss and Target Orders
One of the features of the Bollinger Bands Squeeze trading strategy that I like a lot is that you can set a tight stop loss, and so your target order can be even five times bigger than the stop loss size. This enables you to have a great Risk to Reward Ratio for your positions, which is a very important factor in your success. As you may know, it is not just the success rate of your positions that determines whether you are a profitable Forex trader at the end of the month or not. You can even have a 95% success rate, but still be a losing trader at the end of the month, when your gains are too small and your losses are too big. However, you can be a profitable trader, even when your success rate is as low as 60%, but your positions have a good Risk to Reward Ratio, which means your gains are much bigger than your losses. This is what the Bollinger Bands Squeeze trading strategy can give you.
As you can see on the chart below, you have two options to set a stop loss when the long trade setup forms. You can place it several pips below the low price of the candlestick that has closed above the sideways market’s resistance. This will be a too tight stop loss, and so your target can be even 5-10 times bigger. However, you can set the stop loss below the low price of sideways market support level. This will be a wider stop loss, and so your target can be about 2-3 times larger.
You can set a target order as I explained above. If you do so and the price moves accordingly, you can move the stop loss a little above your entry level, when the price has moved up for about twice of the initial stop loss size. For example, if the initial stop loss is 30 pips, you can move it to breakeven or a little above, when your position is in profit for 60 pips. Then, you can leave the position to either hit the target or stop loss. However, you don’t have to set a target if you are good enough in reading the candlesticks’ and trends’ signals. You can follow the market, candlestick by candlestick, move the stop loss to breakeven when the market has moved up reasonably, and then get out of the market when you think a reversal signal is forming. If you become expert in this, you can even have 1:10 or even better positions, which means your profit will be 10 times larger than your initial stop loss. However, if you are new to Forex trading, then you can set a stop loss and target order the way I explained above, and then move the stop loss above breakeven when it is the time to.
What If No Resistance Line/Level Can be Located?
Good question because sometimes you cannot locate a resistance line, like the one you can see in the screenshot above. Above all, many traders are not good enough in chart analysis, and so they cannot properly plot the lines on the price charts. The good news is, it is possible to keep the Bollinger Bands Squeeze trading strategy more mechanical, not to mix it with technical analysis:
It is always possible to locate a resistance level for a sideways market. But even if you are not happy with the resistance level you have located, you can simply wait for Bollinger Upper Band to move up the way that its horizontal status turns into ascending. As soon as a candlestick pushes up the Bollinger Upper Band, it is called Bollinger Bands Squeeze breakout, and you will have a long trade setup. Don’t forget that you must wait for the candlestick to close. It is possible that it pushes up the Bollinger Upper Band while it is forming, but then it goes down and Bollinger Upper Band becomes horizontal again.
In case of the example you saw in the screenshot above, it is the same candlestick that has broken above the sideways market’s resistance line that also has pushed up the Bollinger Upper Band. I have shown the same candlestick with a bigger magnification to show you what I mean by pushing the Bollinger Upper Band up:
Short Trade Setups
Short trade setups with Bollinger Bands Squeeze trading strategy are the same, but from the opposite direction. You need to wait for a strong down movement, a sideways movement and Bollinger Bands Squeeze pattern, and then the sideways market support breakout. Stop loss and target orders and moving the stop loss to breakeven or below is also the same. There is no technical difference. Just the direction of the market is different:
How Long Does the Bollinger Bands Squeeze Pattern Have to Be?
The first chart you saw above is a typical example. But patterns don’t always form like that. The length of the Bollinger Bands Squeeze pattern has to be long enough in a way that upper and lower bands move sideways for several candlesticks while they are parallel with each other, exactly as you can see in the first example above. When it is like that, it will be easier to locate the support or resistance lines or levels, and it is easier to locate the breakouts and trade setups. However, you are not going to locate such a trade setup every day, unless you check several currency pairs and markets, on different time frames, from daily to weekly and monthly. You can also do this with shorter time frames.
You don’t have to locate a trade setup every day. Just one good and typical trade setup every now and then, like the ones you saw above, is really good. However, you should not expect to see long enough Bollinger Bands Squeeze patterns like the ones you saw above. Many of the Bollinger Bands Squeeze patterns have a shorter length. Now the question is, can you also take those trade setups as well?
Well… it becomes harder and more complicated when the pattern is not typical and is shorter or longer. When the pattern becomes too long, and so it becomes too far from the strong price movement we need to have before the pattern, then you must forget about the trade setup. We need a Bollinger Bands Squeeze pattern that forms right after the strong movement, moves for several candlesticks and then forms a breakout. When the market moves sideways for such a long time, then the trading strategy’s conditions are not met, and you have to wait for another chance.
When the Bollinger Bands Squeeze pattern forms right after the strong movement, but it doesn’t become long enough the way you saw with the examples above, you can still take it but you must consider a few things.
I prefer the sideways market to become long enough and Bollinger upper and lower bands move sideways, horizontally, for several candlesticks, so that it becomes much easier to locate the support/resistance levels and their breakouts. However, there is a higher chance to make mistakes and locate a false breakout when the sideways market, and so the Bollinger Bands Squeeze pattern are too short.
Whether you wait for the typical Bollinger Bands Squeeze patterns and trade setups or you take the short ones as well, you must be disciplined enough about the stop loss. If you set the stop loss properly, you won’t lose a lot and won’t wipe out your account. You can easily recover your losses by taking the other trade setups. Any trading strategy that you follow, you must be careful about money and risk management, otherwise you won’t be profitable at the end of the month.
Here is the example of a Bollinger Bands Squeeze pattern that is not as long as the typical examples I showed you above:
You learned how a Bollinger Bands Squeeze pattern and trader setup has to be and how you can trade by following this trading strategy. As I mentioned above, it is such a strong trading strategy that specially suits novice Forex traders because it is more mechanical rather than technical. However, it takes time to master all trading strategies and increase your success rate. You need to practice and demo-trade the trading strategies to master them. If you are new to this and you have just started looking for a trading strategy and choosing it, please make sure to read this article as well.
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