Of late, here on your favorite trading blog, we’ve been on our toes trying to give you the best Olymp Trade trading strategies you cannot find anywhere else.
And on top of our list has been the Bollinger bands’ aided strategies.
Today, we yet give you another counter-trend trading strategy that requires trading on a trend reversal. And guess which indicators it is based on, the Bollinger bands and RSI indicators.
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How do Bollinger Bands Work?
Well, Bollinger bands are a type of technical analysis tools on Olymp Trade that uses a set of top and lower lines to enclose the price action. These two lines, which by the way, are two deviations away from the centerline (SMA), are what actually make the bands in the BB indicator.
Bollinger bands work under the principle that at all times, the price will always trend along the middle of the bands.
As a result, when the price touches the top band, you should expect it to turn around and head back towards the middle of the BB indicator.
On the flip side, when the price touches the lower band, you should also expect it to change direction and move towards the middle.
As such, you’d say that these bands act as dynamic support and resistance levels, which is true.
But there is one huge problem.
Prices do not always behave like this and at some point, it will break out of these bands.
When that happens, hold onto your wallet because you are in for a treat.
Because 90% of price movements happen within the bands. And whenever a breakout happens, it indicates a major event to follow.
There are two types of Bollinger band breakouts:
- Bullish head fake – occurs when the price breaks the upper band. It is called bullish because it signals looming uptrend continuation. However, these trends don’t last too long. Sooner, prices are contained and a counter-trend is born.
- Bearish breakout – happens when the price breaks the lower band (support level). Signals a bearish momentum continuation. However, these trends don’t last too long. Sooner, prices are contained and a counter-trend develops.
Aside trend reversals, breakouts also signal high volatility which sometimes are signaled by longer low volatility.
Meaning, before a market enters a high volatility zone, it first cuts a share in the ranging zone.
When you see that happening; often the two bands squeezing together for a long period, you should brace yourself for a breakout.
Squeezing happens because the volatility is at its lowest.
Understanding the RSI Indicator on Olymp Trade.
Basically, the RSI tells you whether the asset is overvalued or undervalued based on its position on a scale of 0 and 100.
Between 0 and 100, there are two lines, top line marked at 70 and the bottom line marked at 30. These are the lines you should focus on at all times.
Because they are the ones we’ll use to confirm the Bollinger band signals.
Equally important is the centerline set at 50 mark.
Here, whenever the RSI is above or below this line, you can instantly predict the general direction of the underlying asset’s price movement.
Up to this point, you have a clear basis for this trading strategy.
Moving on, we are now going to introduce the conditions necessary for this strategy to be valid. We are going to look at entry signals, stop loss, and where to take your profits on Olymp Trade Forex.
Where to enter the trade using this strategy.
Be on the lookout for when the price touches either the top or the lower band, then be ready to enter a trading position on the reversal.
Trading on a counter-trend – Open a buy position.
All of the following conditions must be met:
- When the price touches the lower band
- The RSI is in oversold territory
- Enter a buy position because the asset is undervalued, as depicted by the RSI falling under the 30 level. As such, it will soon reverse and start moving up.
Trading on a counter trend – open a sell position
Again, you must see all of the following conditions.
- The price touches the upper band.
- The RSI indicator reaches top price in the overbought zone. This means the asset is overvalued and soon more traders will start dumping the asset. Brace yourself to ride on the downtrend.
One more thing:
The best is yet to come when using this Bollinger band strategy. Remember the squeeze I was telling you about earlier?
Well, it turns out, you can use it as a trigger for this strategy.
Here is what you should do in case you decide to go down this road:
- When you see the bands ranging in a narrow channel for a long time, wait for the price to break the lower band and the candle to close below this band, then open a sell position. That is classic bearish break out right there.
- If you see the bands consolidating into a narrow channel for a long time, wait for the price to break the upper band, followed by the candle closing above the upper band, and then open a long position.
This is best suited for trading long positions. I mean long buy and long sell positions.
As such, you could use a 1-minute chart and hold the position for up to 10 minutes.
Where to put stop loss and take profit when trading Olymp Trade Forex.
This is what I recommend:
Consider erecting your stop loss order below the setup candle for a buy position and above the setup candle bar for sell position.
As for the take profit, you should consider your risk tolerance ratio or price structures of the opposing targets.