Picking Tops and Bottoms on Bollinger Bands© For Binary Options Trading
Full Review of the Picking Tops and Bottoms on Bollinger Bands© Strategy for Binary Options
We are constantly looking for the best trading strategy, the best way of getting a sense of direction and the best entry point. When a trader finally settles on a trading system and is happy with the results, the trading journey is almost over and everything becomes routine: wait for a good setup – trade according to it and according to the money management rules – make money – repeat – buy Malibu house, cars, a boat, another car and last but not least, donate to charity. Cool, but most of us are not there yet and we are still looking for a way to improve so today I’m going to explain another strategy, originally found here: http://forex-strategies-revealed.com/basic/tops-and-bottoms-on-bollinger-bands.
How to pick Tops and Bottoms on Bollinger Bands©
This strategy uses Bollinger Bands, just like the name implies, but I think its true strength comes from the use of multiple time frames. First we need to apply Bollinger Bands to a daily chart and then do the same thing on a H4 or hourly chart. Here are two charts with Bollinger Bands on both of them:
I know what you’re thinking: “Wow, this dude really can’t draw”. And you are right; I really can’t, but my drawing skills are really not that important. Instead, what matters is the fact that my crappy drawing shows a period when price was below the middle line of the Bollinger tool. The strategy uses the default 20 setting for the Bollinger and according to it, when price is under the middle line, the market is in a downtrend and when price is above it, we are trading in an uptrend. This is the way the strategy identifies the trend with the use of the Bollinger Bands and it is pretty reliable. It is not fail proof, but then again, nothing is.
Ok, now that we identified trend on a higher time frame, we will move down to a smaller time frame (H4 or Hourly according to the strategy) and we must find “weakness in an uptrend” and “strength in a down trend”. On the comments section of the site where the strategy is posted there are some guys who don’t really understand what that means so I will try to explain it: a down trend is characterized by weakness of the underlying asset, but price doesn’t travel in a straight line and even if the overall direction is down, price will have moments of strength before dropping lower. The opposite thing happens in an uptrend: there is overall strength but also moments of weakness, when price moves lower. This is the well known “retracement”.
So for our next step, we must identify strength in the down trend (remember that on the Daily chart from our picture we identified a down trend). This strength is represented by a touch of the upper Bollinger band (point “1” on the chart) so when we see price reaching the top band, we place a Put. That’s about it; now we wait calmly for the expiry time and think about the Malibu house…but in the mean time, let’s recap the entry rules:
Price on the Daily chart must be above the middle Bollinger line
Price on the H4 chart must touch the lower Bollinger Band
Price on the Daily chart must be below the middle Bollinger line
Price on the H4 chart must touch the upper Bollinger Band
Why does the Strategy Suck?
If you can see the bigger picture, and understand the principle, this strategy doesn’t Suck at all. But for the people who have problems understanding “weakness in an uptrend” and “strength in a down trend” (in other words, the principle of identifying a trend and then trading the retracement), this strategy will suck big time.
Why the Strategy Doesn’t Suck?
Any trade taken in the direction of the overall trend has a higher probability of being successful. The strategy makes you trade only in the direction of the main trend and if the trader manages to keep disciplined and follow the simple rules, this one can be a money maker.
Wrapping it up:
Multiple time frame analysis has always been one of my favorite ways of trading and I’m sticking to it, so my personal opinion is that you can pick tops and bottoms with this strategy, but it needs testing and definitely adapting to each trader’s personality and style. Extra filters could be a great addition, but be careful not to overcomplicate things.
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