(7) Trading Overlapping Edge In Bollinger Bands
It is one of the lesser known Bollinger bands trading strategies for every trader. Most of the traders are in a habit of making positions only on the basis of default settings of Bollinger Bands® i.e. with 20-period simple moving average.
But, what about adding 50-period or even 200-period simple moving averages as well? Here is a USDJPY Daily chart — with 20 & 50 period Bollinger Bands®.
The 50-period bands are shown as thicker bands while 20-period bands are thinner bands. In this chart, you can see M Top formation with both bands.
But, some extra information can be derived from these overlapping bands i.e. 20-period & 50-period bands. Before formation of first top in double top pattern, the 20-period upper band was earlier trading outside of 50-period upper band.
This indicates strong momentum in the USD. The initial fall was accompanied with overlapping of 20-period & 50-period upper bands. The 20-period upper band was now trading inside the 50-period upper band.
The second top of double top pattern is much far away from 50-period band as compared to 20-period band. This indicates that momentum has died down.
Therefore, taking a short position carried higher risk in initial stage of pattern is less risky in the second part of the pattern. It is perhaps due to decreasing volatility & momentum.
Similarly, you can add 200-period bands to the chart to determine strength of prevailing trend. If prices are touching 200-period upper bands then it indicates extremely bullish trend. Therefore, you should stay away from making short positions at this stage. It is because it will carry excessive risk as long as price is touching 200-period upper band.
You can also utilize overlapping band strategy when analyzing trend after Bollinger Band Squeeze breakouts. Here is another USDJPY Daily chart — with 20 & 50-period Bollinger Bands® for Squeeze set up.
In this chart, breakout of squeeze pattern is extremely bullish in nature. It is because price is touching both 20 & 50-period bands in an overlapping manner.
As a general rule, 50-period breakout will be a strong indication of a longer breakout as compared to breakout of 20-period alone.
Therefore, shorting even at yearly high will be highly risky trade as price was well outside 50-period bands.
Image Source: Dukascopy
- Bollinger Band double bottom chart: Pinterest & Traderhq