EUR/JPY Bollinger Bands Squeeze Follow Up
In this article, I am following up with the example of a current forming Bollinger Bands Squeeze pattern which is EUR/JPY. I reported this forming Bollinger Bands Squeeze on my article that was published 5 days ago.
If you refer to EUR/JPY daily chart, you will see the Bollinger Bands Squeeze I explained is still on going and has not been broken yet. The rule of trading the Bollinger Bands Squeeze says that first you have to wait for the price to hit the upper or lower band. That means the squeeze is broken and the market wants to head to a special direction: If it hits the upper band, it wants to go up and visa versa.
As you can see on the below chart, the 2017.01.09 daily candlestick upper shadow has crossed the upper band, but this is not what the rule means. I believe the candlestick body has to break above the upper band in order to come to this conclusion that bulls have taken the full control and the price wants to go up. This is something that experience has proven so far. If you want to trade the Bollinger Bands Squeeze breakout by following the above rule roughly, then chances are you make mistakes and you lose money. You have to be more careful and do your due diligence before risking any money.
As I explained, the 2017.01.09 daily candlestick crossed the upper band, but then it closed inside the squeeze which is still continued.
To lower the risk of trading the Bollinger Bands Squeeze breakout, you can consider the below item:
1) If there is a strong movement before the Bollinger Bands Squeeze, you are lucky because there is a higher chance that the market follows the same strong movement.
This is what you can see with the current EUR/JPY Bollinger Bands Squeeze (the big green arrow on the above chart). As there is a strong up movement before the Bollinger Bands Squeeze, there is a higher chance that the market breaks above the squeeze and goes up.
2) You can refer to the longer time frames and see how the overall market direction looks.
Although there is a strong up move before the Bollinger Bands Squeeze on EUR/JPY daily chart, this market is bearish on the weekly and monthly charts. So bears have the overall and long term control, although bulls take the control on the shorter time frames like daily and shorter. Even on the monthly chart, the Bollinger Middle Band is about 300 pips above the current market price (see below). Therefore, even if bulls take the control again and make the price break above the Bollinger Bands Squeeze, it can go up for more than 300 pips and then it is strongly possible that some strong bearish reactions appear.
3) One of the other strategies that some traders follow to take the advantage of the Bollinger Bands Squeeze breakout, is referring to the shorter time frames. This may help you monitor the breakout in more details and it can lower your mistake probability, although it can also cause you to make more mistakes.
Please note that the market is too slow when Bollinger Bands Squeeze forms. As a result, the signals and breakouts on the shorter time frames may not work accurately and can cause you to take a wrong position. So be careful.
For example, if you refer to EUR/JPY four hours chart now, you can see a Symmetrical Triangle that its support is broken by the 2017.01.10 20:00 four hours candlestick (see below). However, as you can see the next candlestick closed above the broken support line again. You can see this inaccuracy when the market is not liquid and is too slow. The price just moves without any goal because of some small transaction. Indeed, the big participants are sitting on the fence and so the market has no control for now. That’s why the breakouts are inaccurate.
If you follow the Bollinger Bands Squeeze breakout on the same time frame (daily in case of EUR/JPY), there is a less chance of making mistakes, if you really wait for a real and true breakout. As I mentioned above, one of the candlesticks bodies has to cross one of the bands strongly.
4) Experiences has proven that even in case of a strong and true breakout, there is still a chance of changing the direction right after the breakout. This is what you can see with some of the Bollinger Bands Squeeze breakouts.
Therefore, never take more than 2-3% risk even with the strongest trade setups and always have a solid and reasonable stop loss or exit strategy. If you get out with a 2% loss, you can easily take the other direction and recover the loss.
Good luck 🙂