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As you can see in the first highlighted area on Chart 1, price came back from the lower Bollinger band and formed a hammer (ish) pin candle. This suggests to me the area has been rejected quite strongly, which is confirmed as the price starts to wander into “no mans land”, within the middle of the Bollinger range.

This is when NOT TO TRADE. I stay flat when price is near the center of the Bollinger bands.

The price starts to head towards the upper Bollinger. At this point I will be using my strategy to look for breaks to be long, and sure enough it does. This is when I trade, when price is pushing into the extreme.

This is when there is liquidity and momentum.

As things progress, price once again falls back into that middle area, and it is time to sit on my hands. Yes I get twitchy fingers, but you have to be disciplined, right?

I get a false signal as price starts to push the lower Bollinger. No problem. My stops and risk take care of this.

Price once again moves to the middle area then pushes the top Bollinger. I look for a signal, and I’m in.

Chart 1 is for illustration purpose only, but it is a true representation of my strategy and thinking.

An Important Note:

When the Bollinger bands say “trade”, personally I take the trades my strategy throws out. But for safety you can filter the idea even more.

To gain confidence with this, try only looking for the movements after a consolidation period in the center of the bands. This is when the bands start to contract.

When price begins to push the upper or lower band, is it happening AFTER a consolidation area and contraction in the Bollinger bands?

If they’ve have had time to contract, and move sideways, the price is usually building up energy.

However, if price has reversed directly from a high or low and zoomed off to the other extreme, this can be a volatile period. It’s wise to stay away from these trades until you are comfortable with the idea.

Let me show an example of a 15 minute GBP/USD chart (see Chart 2)

Forex-Strategy-Are-you-a-Victim-of-Overtrading-gbp-usd-15min

Chart 2: 15 minute GBP/USD chart

You see a steady decline at the beginning of the chart, which is pushing the extreme of the lower Bollinger band. Then price begins to move towards the center, and the bands begin to contract. The direction is undecided, and is shown by the sideways nature of the bands.

The price then starts to push on the extremes, but gives out some false signals. Personally, I would have been stopped out for small losses. No problem.

But the best trade is to wait until the bands open up a little, when price is pushing the extreme.

This is just what happens afterwards. The Bollinger bands begin to open up, and price pushes the highs. This is a good time to be looking at your system for long trades.

So now you can see when I do, and when I don’t trade. It’s nice to sit on my hands now and again. And my money is safely tucked up in my account, rather than liquid in the market for others to take advantage of.

Carl Croft
Forex and Index futures active trader
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