The double Bollinger band strategy is an interesting approach to technical analysis that aims to identify opportune moments to enter and exit trades. By leveraging the insights provided by Bollinger bands, traders can better time their market moves.
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What Are Bollinger Bands?
Bollinger bands were developed in the 1980s by famous technician John Bollinger.
They consist of three lines plotted on a price chart:
- A middle line that serves as a simple moving average (typically 20 periods)
- An upper band that is a standard deviation above the middle band
- A lower band that is a standard deviation below
Bollinger bands adapt to volatility changes. When volatility increases, the bands widen and vice versa. This dynamic makes Bollinger bands ideal for determining overbought and oversold levels.
Traders often use Bollinger band squeezes to spot volatility contractions. Band squeezes signal declining volatility and precede strong breakout moves.
The Double Bollinger Band Strategy
The double Bollinger band tactic builds on these principles by layering additional bands.
Here is how it works:
- Plot the standard 20-period Bollinger bands on the price chart
- Add Bollinger bands using a longer lookback period, like 50
- Analyze the relationships between the two sets of bands
- Enter trades based on band interactions and breakouts
Using two sets of bands provides more information and allows traders to fine-tune entries and exits. The outer bands serve as support and resistance zones. Breakouts beyond those levels often precipitate powerful moves.
Key Double Bollinger Band Signals
Here are some of the most important trading signals to watch for with the double Bollinger method:
Band squeeze setups still apply with two sets of bands. When volatility contracts and the bands tighten, a surge in volatility often follows. Squeezes between all four bands signal major impending moves.
The wider 50-period bands establish extra overbought/oversold zones. Temporary moves beyond the first set of bands may still have room to run to the outer bands.
Breakouts beyond the outer bands indicate highly directional momentum. These moves tend to attract trend-following traders and produce outsized returns. The wider bands make breakouts more statistically significant.
The additional bands create more dynamic crossover possibilities. Bullish crossovers occur when prices break above a band, and bearish crossovers occur when prices break below. More crossover signals emerge with two band sets.
Optimizing the Double Bollinger Band Strategy
Traders can optimize double Bollinger band trading as follows:
- Experiment with different moving average periods for the base and outer bands
- Incorporate momentum indicators like the RSI for additional confirmation
- Use outer band breakouts to set profit targets
- Tweak strategy rules and refine based on backtesting
- Focus trades in the direction of the prevailing trend
With experimentation, traders can create robust rule sets leveraging double Bollinger band dynamics.
The Bottom Line
While more complex than a single set of bands, double Bollinger bands provide a powerful expansion of John Bollinger’s original technique. The additional bands give traders more reference points for analyzing price action and timing trades. Squeezes, breakouts, crossover signals, and overbought/oversold readings can all be further refined using two bands. With backtesting and practice, double Bollinger bands can boost strategy effectiveness.
What are the advantages of using double Bollinger bands?
The double Bollinger bands add an extra set of bands based on a longer lookback period. This provides more overbought/oversold thresholds, increases the significance of breakouts, and provides additional crossover signals. The extra bands give traders more data points for analyzing price action.
How do you set up double Bollinger bands?
To set up the double Bollinger band, first plot the standard 20-period band on the price chart. Then, add an additional set of bands based on a longer 50-period lookback. The 20-period bands provide a short-term signal, and the 50-period bands establish wider overbought/oversold zones.
What indicators work well with double Bollinger bands?
Momentum oscillators like the RSI are excellent for confirming overbought/oversold readings and divergence signals from the double Bollinger band. The MACD and stochastic can also boost effectiveness. Trend-following indicators help trade band breakouts in the direction of the prevailing trend.