Bollinger Bands. - Rob Booker

W. R. Booker & Co.
1 on 1:
Day 7
The Bollinger Bands.
© 2004 W. R. Booker II. All rights reserved forever and ever. And ever.
The information contained in this ebook is designed to teach you methods of
watching forex quotes so that you can make money. Bollinger Bands are my
favorite tool.

Bollinger Bands.
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Day 7 – page 2
Using Bollinger Bands is quite easy. These Bands predict price movement based
on market volatility. When price is more volatile, the Bands are wider. When the
market is quiet, the Bands tighten together. Price tends to move back to the center of
the Bands. As you can expect, if price tends to move back to the center of the Bands,
then what should happen on the far right edge of the chart above?
When price breaks outside a Band, it signals a buy or sell order. In the chart above,
you see on the far right edge that the candles jump outside of the top Band. Because
the candles exceeded the top Band (by quite a bit), we can expect that it is going to
settle back down again. Here are the next few candles on the chart:

Day 7 – page 3
As you can see, the price tended to move back to center. This trade is especially
powerful when the move touched resistance (or support on the downside), but was not
able to break through. To time an entry on this trade, simply chart a lower time frame
(in this case the 30 min or the 10 min chart) and wait for the reversal to show up on
that chart … and then enter a trade. This would be a classic “Bollinger Bounce” trade
– when the candles bounce off the top band and go back to center, or they bounce off
the bottom band, and go back to center.
The Bands themselves show a certain level of support and resistance, and many
traders have developed strategies that simply trade the Bollinger Bounce – entering at
the extremes and selling a the opposite extreme, with stops placed at the center (where
the price tends to reach no matter what). This can be profitable, but tricky, as
sometimes price movement keeps expanding the Bands on the up- or down-side, as in
a trending market:

Day 7 – page 4
When a Band widens as price approaches, it’s a good sign that further movement in
the direction of the Band can be expected. When a Band flattens as price approaches,
it signals that price might bounce off the Band, or violate the Band and then drop back
to center. If the Band flattens as price approaches, but then widens a bit – make sure
you’re ready for a possible breakout. More on that in a moment.
See the second chart again: what’s happening to the lower Band as the price
approaches the center (following that breakout and reversal)? The lower Band is
dropping through the floor. Any ideas on what’s going to happen next?
The price is bound to drop further. See the chart below, which represents the next
few candles:

Day 7 – page 5
Use Bollinger Bands in combination with other indicators. For example, in the
chart above, as soon as the price approached center, and the lower Band widened, you
could also see the MACD start to produce red bars. This was a great indicator that
bears were beginning to take control. We would know the bear move was over when
the lower Band began to tighten up – which it’s not doing in the chart above. This
would signal further price declines (which in fact is exactly what happened).
To summarize, it’s important to track the following when using Bollinger Bands:
1. How wide are the Bands? Wider Bands represent volatile markets.
2. Do the Bands expand or flatten as price approaches?
3. What does the MACD tell you when you compare it?
4. Compare longer time-frame charts with shorter ones – and chart the Bollinger
Bands on both.
5. Remember that eventually, price tends back to center.

The Bollinger Squeeze.
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The Bollinger Squeeze is probably one of my favorite systems, and it is pictured
above. Essentially, the Bands contract and “squeeze” the candles, finally
culminating in a breakout.
Here are the elements of a Squeeze:
1. The Bollingers tighten up horizontally on the 15 min chart AND / OR
2. The Bollingers tighten on the 1hr chart
3. The time of day is:
a. The opening of the EUR session
b. Near the release of an important economic report
Day 7 – page 6

That’s the basic setup to watch for. This happens frequently – not for a zillion
pips every time, but it does happen a few times per week. Here’s how to manage
the trade:
How do you time the breakout?
The best breakouts will occur at the opening of the EUR session, or at the
release of some important economic report in the US. The monthly US
unemployment report, any US interest rate decision, and the CPI report are just
three examples.
How do you profit from the breakout?
The best way to take advantage of a trade is to simply place entry orders above
and below the Bollinger Bands 10 minutes before the release of the economic
report, or near to the open of the EUR session. Or, alternatively, you might place
entry orders above and below the current price (which may be at either extreme of
the Bollingers) right before the release of the news.
What should you watch out for?
Day 7 – page 7
Right before a breakout, the candles might actually perform a fake move – in the
opposite direction of the breakout:

Day 7 – page 8
In the chart above, you can see that just before the huge red candle downward,
the pair actually jumped up a bit. This happens in all time frames, on all pairs, for
nearly every significant breakout. I cannot begin to speculate as to why this
occurs.
But I will say that it does occur, and that you should be aware of it. To prevent
yourself from getting burned, just remember to place your entry orders far enough
away from the current price so as to avoid getting swept up too early in a trade.
If you do find that you get swept into a trade a bit early, then you’re going to
have two things to save you:
1. You’re going to use stops – usually about 30 pips
2. You’re going to be right there and can close the order manually if you feel
that’s the best thing to do.
How many pips should you try to make?
This is the question everyone always asks me. Answer:
Take 10 pips to start. If the Bollinger Bands have been tight and constricted for
over 4 hours on the 15 min chart, then go for 30 or 40 pips, or even leave the limit
wide open and just let the trade fly. Otherwise, go for 10, and take the pips.
If you feel like you’re missing out on more money – because you’re only taking
10 pips – then experiment cautiously with increasing your limit or deleting the
limit. Just remember than many successful traders lose all of their money by
simply trying too hard to get too many pips.
Practice makes perfect
As with any strategy, you must practice this one in order for it to become
profitable consistently. Check out the historical charts – look back as far as you
can on the 15 min charts, and watch for where the Bollinger Bands tighten up.
What kind of trading opportunities do you see? Which ones would you take? What
other indicators help you decide to take the trade (or not)?