Learn the "Double-Bollinger" Strategy
06/07/2012 1:00 pm EST
The "Double-Bollinger" trading strategy can help forex traders find and validate trend-based opportunities in especially volatile market conditions, explains Kathy Lien.
Well, traders are always looking for a consistent strategy they can use in the markets, and our guest today is Kathy Lien. Kathy, what are some traits that good traders have in common, and what kind of strategies are they using these days?
There is quite a bit of volatility in the markets these days. So, you have one or two choices: 1) either stay ultra long term; or 2) stay ultra short term.
In terms of ultra long term, I’ve got a nice little strategy called the double-Bollinger strategy, which basically helps you profile the market and lets you know whether we’re in an uptrend, downtrend, or in a range.
Typically, when we’re in highly volatile market environments, that’s still just volatility on an intraday basis. For the most part, in some currency pairs these days, we’re still seeing nice trends, and the Bollinger bands help you identify whether we’re in a trend. If we are, it’s still better to look for opportunities to join that trend then to fade it.
The other option is to go ultra short term where you’re not staying in a position more than a couple of hours because you don’t necessarily want to be subject to any volatility that’s happening while you’re sleeping or when you’re just away from the trading screen.
So you basically have one of two choices, and I think that’s the way you need to approach it when the markets are volatile.
I know about Bollinger bands and the two bands that go around, but what is a double-Bollinger band?
The double-Bollinger band is a strategy I write about in the The Little Book of Currency Trading. In addition to the standard Bollinger bands, whose settings are 20 periods and two standard deviations, we’ve added on the 20 period, one standard deviation, so it creates for you four bands, or zones.
The two bands on the top are known as the uptrend zone; the two bands on the bottom are known as the downtrend zone. So if the currency pair has a very strong uptrend, usually it will remain in the one-two band on the upside. If it’s in a downtrend and the downtrend is strong, it will be in the one-two band on the downside.
When it comes out of that, however, and when it goes from the downtrend into the range-trading zone—the middle space—that’s when you know that the trend is breaking. It’s exhausting, and you’re going to have a more significant turn.
Is there a specific currency pair that you like to use this on, or will it work across all of them?
I like to use them on almost all of the currency pairs except for the ones that are extremely range-bound, because sometimes you have a nice tight range where the Bollinger bands are useless.
EUR/CHF for the past couple of months has been stuck in a range after the Swiss National Bank pretty much pegged it above 1.20, so there is no action there and you shouldn’t use it.
Usually the ones that are more trending and where the bands are wider, that’s where you have the better opportunities using Bollinger bands.