The signal for a possible turn from a trending market to ranging market is shown circled at the bottom of the chart has formed. If this has occurred in confluence with other factors such as support/resistance, round number, significant pivot level or Fibonacci retracement level, the signal is stronger. It may have been possible to take a trade at this level although many traders prefer to wait for confirmation that price is indeed ranging by a turn at the opposite band. You can see this in the other circled points at which the new trending market has been confirmed and three different entry levels are shown.
Now we come to the mechanics of entry, stop loss and take profit limits. It’s critical to understand that this is essentially a scalping forex trading strategy. The idea is to enter immediately the signal is confirmed at the market, with an aggressively tight stop loss, and take profit at the opposite Bollinger band.
Once the move is confirmed by the price you should move the stop loss to breakeven as soon as possible. If you don’t do this you can be easily caught by price bouncing at the Bollinger mid-band and retrace to take out your stop. This would likely have happened in the first trade had you not immediately moved to breakeven once it was safe to do so.
Of course, you will have to use your own judgment as to when exactly it is safe to move to breakeven: do it too early and you will be stopped out by normal retracements even if the price is moving in the direction you wished!
As a final recommendation with this particular strategy, you will want to trade in a very quiet market, with no news announcements etc imminent, on a pair that is not given to spiky price action. And it goes without saying that you should not enter trades based purely on the fact that price has reached an outer band. Look for a confirmation at the outer band and with other indicators.
The above chart shows some classic entry areas when the price has broken through the band which would indicate that it is overbought or oversold and could be sold or bought respectively. You would then wait until it reverts back to the moving average. Risk-averse traders can choose to put the take profits of the moving average line but this will reduce the profit per trade and increases the risk reward ratio.
Trading an obvious trend is a lot more straightforward than trading when the price is range bound, or appearing to move sideways. Many traders actually pass on the possibility of trading. There are however strategies for coping with this much more narrow range of price movement. The Bollinger Band Bounce is based on the observed. Price will approach an outer band, encounter resistance and snap back towards the opposite band.
One way to make use of this behavior is to trade the movements at the outer bands. This is not very effective in a sharply trending market, but when the market is in a range it can be very effective for any traders looking for short-term scalping opportunities.
The first thing you must do when looking to trade this strategy is to determine that price is indeed in a range. There are many ways to do this but with Bollinger bands, I find the simplest is to check if the price is staying on one side or the other of the mid-band. If so, and the price is making consistently lower lows then the price is trending down. And the opposite, of course, applies for an uptrend: if the price is staying above the mid-band and making consistently higher highs then we are in an uptrend.
The following illustration shows price in a downtrend at the left of the screen turning into a trending market at the right: