Chapter 9
Technical Strategy: Trading with Double Bollinger Bands

One of the most useful technical indicators in my experience is Bollinger Bands. Traditionally, Bollinger Bands are used as overbought and oversold indicators, but given the trending nature of currencies, there are more efficient ways to use the bands. Traditionally, Bollinger Bands consists of three lines—the 20-period moving average and the two standard deviation bands above and below the moving average. If the currency pair rises to the upper Bollinger Band, it is considered overbought because the move extended to an extreme level and should therefore be faded. The same is true if it drops to the lower Bollinger Band. Unfortunately, currencies are trending, and using the 20-period two standard deviation bands may not be the best way to trade. Take a look at Figure 9.1. In this daily chart of EURUSD, the arrows highlight the points where the currency pair “hugs” the second standard deviation band. If you bought each time EURUSD touched the lower band or sold each time it touched the upper band, there would be significant losses before the currency pair finally turned around.

Figure 9.1 EURUSD Bollinger Band Daily Chart

Source: eSignal

The better technique would be to add another set of Bollinger Bands—the 20-period, one-standard deviation. This would put four bands on the chart if the basis or the 20-period moving average is removed, and most charting packages will allow you to do that. Figure 9.2 shows how the same EURUSD daily chart with look with two sets of Bollinger Bands. The outer lines are the two-standard-deviation Bollinger Bands, and the two inner lines are the one-standard-deviation Bollinger Bands.

Figure 9.2 EURUSD Bollinger Band Daily Chart

Source: eSignal

Using Double Bollinger Bands to Pick Tops and Bottoms

Having two sets of Bollinger Bands on your chart is a much more effective way to pick a top or bottom in currencies. The general rule of thumb is that we don't buy a bottom until the currency pair has traded above the first standard deviation Bollinger Band. Along the same lines, we do not sell a top until the pair trades below the first standard deviation Bollinger Band. While this technique may not pick the perfect bottom, it can help avoid prematurely picking a top or bottom which can mean major losses in a trending environment. Here are the rules for the long and short trades on a daily chart for picking tops and bottoms using the double Bollinger Bands.

Strategy Rules for Long Trade

1. Look for the currency pair to be trading between the lower first and second standard deviation Bollinger Bands.
2. Look for a close above the first standard deviation Bollinger Band.
3. If so, BUY at close of candle or 5pm NY Time.
4. Stop 50 pips below first standard deviation Bollinger Band.
5. Close half of position when it moves by amount risked; move stop on rest to initial entry price (breakeven).
6. Close remainder of position at two times risk or trail the stop.

Strategy Rules for Short Trade

1. Look for the currency pair to be trading between the upper first and second standard deviation Bollinger Bands.
2. Look for a close below the first standard deviation Bollinger Band.
3. If so, sell at close of candle or 5pm NY Time.
4. Stop 30 pips above first standard deviation Bollinger Band.
5. Close half of position when it moves by amount risked; move stop on rest to initial entry price (breakeven).
6. Close remainder of position at two times risk or trail the stop.

Lets take a look at the same EURUSD chart. Figure 9.3 shows the points at which a trade would have been entered, and in most cases, it was a more effective way to pick a top or bottom in the currency pair.

Figure 9.3 EURUSD Bollinger Band Daily Chart

Source: eSignal

Now let's take a look at some examples in more detail. In Figure 9.4, we see that on May 18, the EURUSD, which had been trading between the two upper bands, fell strongly to break out of the zone and close below the first standard deviation Bollinger Band. We sell at the NY close (there's usually a leeway of two hours). A two-lot trade is established at 1.1313 with a stop 30 pips above the first standard deviation Bollinger Band (1.1341) at 1.1371. The risk is 58 pips, which means that the first exit is 1.1313 minus 58 pips or 1.1255. The second profit target is 1.1197, which is two times risk or 116 pips. The first and second profit targets are reached on the very next day when the currency pair drops to a low of 1.1119, for a profit of 58 pips on the first half of the position and another 116 pips on the second half. If the stop was trailed using a moving average or percentage, a trader may have been able to capitalize on the selloff that ensued.

Figure 9.4 EURUSD Short Trade

Source: eSignal

Figure 9.5 shows that on June 2, the EURUSD, which had been trading between the two lower bands, rose strongly to break out of the zone and close firmly above the first standard deviation Bollinger Band. We buy at the NY close (there's usually a leeway of two hours). A two-lot trade is established at 1.1151, with a stop 30 pips below the first standard deviation Bollinger Band (1.0970) at 1.0940. The risk is 211 pips, which means that the first exit is 1.1151 plus 211 pips, or 1.1361. This profit target is reached two days later, when the currency pair races to a high of 1.1380. At the time, the stop is moved to 1.1151, and the following day the breakeven stop is hit, and we end up banking only +211 on the first half of the trade with no losses or gains on the second half.

14:40 GMT April 19th
1 Month To 1 Year Risk Reversal
Currency	1M R/R	3M R/R	6M R/R	1YR R/R
USDJPY	0.3/0.6 :IC	0.7/1.0 JC	1.1/1.3 JC	1.3/1.6 JC
EURUSD	0.1/0.3 EC	0.0/0.3 EC	0.0/0.3 EC	0.1/0.4 EC
GBPUSD	0.0/0.3 SP	0.0/0.3 SC	0.0/0.3 SC	0.0/0.3 SC
USDCHF	0.2/0.2 CC	0.0/0.3 CC.	0.0/0.4 CC	0.1/0.5 CC
* JC = Japanese Yen Call			* SC = Sterling Call
* EC = Euro Call			* CC = Swiss Call
* SP = Sterling Put

Figure 9.5 EURUSD Long Trade

Source: eSignal

Using Double Bollinger Bands to Determine Trend versus Range

In addition to identifying levels to pick tops and bottoms, the double Bollinger Bands can also be very helpful in determining the market environment. One of the most commonly asked questions in forex is whether a currency pair is in trend or range. When the pair is trading between the two lower or upper Bollinger Bands, it is in trend, and when it is trading between the first standard deviation Bollinger Bands, it is in range, as shown in Figure 9.6. When the currency pair is in trend mode, it is best to look for opportunities to join the trend. When it is in the range zone, picking tops and bottoms is preferred.

Figure 9.6 GBPUSD Bollinger Band Trend Range Chart

Source: eSignal

Using Double Bollinger Bands to Join a New Trend

Another way to use the double Bollinger Bands is to join a new uptrend or downtrend using a daily chart. Here are the trading rules:

Strategy Rules for Long Trade

1. Look for the currency pair to close above the first standard deviation Bollinger Band.
2. Check to see if the last two candles were below the first standard deviation Bollinger Band.
3. If so, buy at close of candle or 5pm NY Time.
4. Initial stop at +65 pips.
5. Close half of position at +50 pips; move stop on rest to initial entry price (breakeven).
6. Close remainder of position at +195 pips.

Strategy Rules for Short Trade

1. Look for the currency pair to close below the first standard deviation Bollinger Band.
2. Check to see if the last two candles were above the first standard deviation Bollinger Band.
3. If so, sell at close of candle or 5pm NY Time.
4. Initial stop at +65 pips.
5. Close half of position at +50 pips; move stop on rest to initial entry price (breakeven).
6. Close remainder of position at +195 pips.

Here are some examples:

In Figure 9.7, we see that USDJPY closed above the first standard deviation Bollinger Band on May 18. We check to see if the last two candles were below the band and the rules are satisfied, allowing us to initiate a long trade at 119.97. The stop is placed 65 pips below at 119.32. The target for the first half of the position is 50 pips, or 120.47, and the target for the second half is 195 pips, or 121.92. The first profit target is reached 24 hours later (which is generally the case). When that happens, the stop is raised to 119.97, which is the initial entry or breakeven price. The trade is left on and the second profit target of +195 pips is reached six trading days after the trade was first initiated.

Figure 9.7 USDJPY Long Trade

Source: eSignal

In Figure 9.8, we see GBPUSD close below the first standard deviation Bollinger Band on March 4, so we check to see if the last two candles were above the band and the rules are satisfied, allowing us to initiate a short trade at 5pm when the currency pair is trading at 1.5263. The stop is placed 65 pips above at 1.5328. The target for the first half of the position is 50 pips, or 1.5213, and the target for the second half is 195 pips, or 1.5068. The trade floats for 24 hours, then GBPUSD drops sharply, hitting our first and second profit target on the very same day.

Figure 9.8 GBPUSD Short Trade

Source: eSignal

We encourage you to lay the Bollinger Bands on your charts and look for more examples of these strategies in action. There are many ways to use the double Bollinger Bands for forex trading. Both of these strategies are for daily charts, but different strategies and rules can be used for intraday trading using the bands.