Bollinger Bands Momentum Breakout Forex Trading Strategy

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Bollinger Bands Momentum Breakout Forex Trading Strategy

Momentum Breakout strategies are probably one of the most lucrative types of trading strategies. It allows for high yields that could provide profits that are three to four times more than the risk placed on the stop loss. This type of strategy, if implemented well, would provide consistent profits over the long run.

Yes, Momentum Breakout strategies are great, but where do we find them? To understand where to find momentum breakouts, we must first understand the cyclical behavior of the market. The market behaves in two ways, expansion and contraction, the difference would only be the degree of the volatility and the timeframe where the contraction and expansion could be observed.

These two phases would usually move in cycles. Traders could expect that the market would expand after a clear market contraction. On the other hand, the market would usually contract right after a strong market expansion. The only exception is when there is a strong reversal move that would immediately reverse a prior expansion phase.

Trading momentum breakouts would be easier if traders could identify market contractions because it is usually right after the market contraction where a strong momentum breakout occurs.

Bollinger Bands Momentum Breakout Forex Trading Strategy is a strategy that allows traders to identify contraction phases which occur prior to a momentum breakout. It also allows traders to systematically identify and confirm a momentum breakout based on two simple technical indicators.

Bollinger Bands

Bollinger Bands is probably one of the most complete technical indicators. It is mainly a trend and momentum indicator, but it also provides indications for volatility and overbought or oversold markets.

The Bollinger Bands is composed of three lines or bands. The middle line is a basic Simple Moving Average (SMA) line usually set at 20 periods. The outer lines are standard deviations derived from the middle line.

Because the middle line of the Bollinger Bands is a 20 SMA line, the Bollinger Bands is technically a trend indicator. Traders could identify trend direction based on the location of price in relation to its midline, as well as the slope of the midline.

The outer bands are used for a variety of purposes.

As a momentum indicator, traders could identify a strong momentum whenever price would breakout of the Bollinger Bands and stay close to one of the outer bands.

It could also be used to identify the exact opposite, which is a probable mean reversal. Prices that are beyond the outer bands are considered overbought or oversold. If price action shows signs of rejection of the outer bands, then price might start to reverse.

Lastly, it could also be used as a volatility indicator. The bands would simply contract during a contraction phase and expand during an expansion phase.

100 Pips Momentum Indicator

100 Pips Momentum indicator is a custom technical indicator developed to identify strong trends and momentum.

It is composed of two modified moving average lines. The faster line is color blue while the slower line is color red. These lines act as a moving average crossover indicator.

Bullish trends are indicated by the blue line being above the red line. Inversely, bearish trends are indicated by the blue line being below the red line. As such, crossovers of the two lines would indicate a probable trend reversal.

The lines are characteristically very smooth. It does not create sudden spikes and reversals even if price would create some minor spikes. Despite its smoothness, it still is very responsive to price movements. This combination of smoothness and responsiveness makes it an excellent trend following indicator.

Trading Strategy

Bollinger Bands are one of the best indicators to use when trading momentum breakouts. This is because Bollinger Bands could provide information regarding market volatility and momentum.

This trading strategy trades on momentum breakouts based on the Bollinger Bands and confirms the momentum breakouts based on the 100 Pips Momentum indicator.

To trade this strategy, traders should wait for the market to contract which is indicated by a contracted Bollinger Bands. We then wait for price to expand with strong momentum. This is indicated by a strong momentum candle closing beyond the Bollinger Bands.

The 100 Pips Momentum indicator should also confirm the momentum breakout based on the position of the two lines, the slope of the lines and their location in relation to the midline of the Bollinger Bands.

Momentum breakouts using Bollinger Bands should be confirmed by price breaching above the breakout candle. For this reason, once the conditions above are met, we would be using stop entry orders to trigger the trade.

Indicators:

  • Bollinger Bands
  • 100pips Momentum

Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Bollinger Bands should be in a contracted phase.
  • Price should close above the upper Bollinger Band with strong momentum.
  • The Bollinger Bands should start to expand.
  • The blue line of the 100 Pips Momentum indicator should be above the red line.
  • Both lines should slope up and cross above the midline of the Bollinger Bands.
  • Set a buy stop order above the momentum breakout candle.

Stop Loss

  • Set the stop loss on the fractal or congestion below the entry candle.

Exit

  • Close the trade as soon as the lines of the 100 Pips Momentum indicator flatten out.

Bollinger Bands Momentum Breakout Forex Trading Strategy

Bollinger Bands Momentum Breakout Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Bollinger Bands should be in a contracted phase.
  • Price should close below the lower Bollinger Band with strong momentum.
  • The Bollinger Bands should start to expand.
  • The blue line of the 100 Pips Momentum indicator should be below the red line.
  • Both lines should slope down and cross below the midline of the Bollinger Bands.
  • Set a sell stop order below the momentum breakout candle.

Stop Loss

  • Set the stop loss on the fractal or congestion above the entry candle.

Exit

  • Close the trade as soon as the lines of the 100 Pips Momentum indicator flatten out.

Bollinger Bands Momentum Breakout Forex Trading Strategy 3

Bollinger Bands Momentum Breakout Forex Trading Strategy 4

Conclusion

Momentum breakout strategies are inherently high risk high reward strategies. This strategy is no different from other momentum breakout strategies. It relies on high reward-risk ratios while allowing some minor losses every now and then. However, this is still very profitable because the open ended exit strategy allows traders to capitalize on market runs, which usually occur right after a momentum breakout. These trades would allow traders to profit much on a single trade.

Traders who could master identifying contraction and expansion phases using the Bollinger Bands could capitalize on this strategy. It also requires psychological discipline as having some minor losses every now and then could demoralize some traders. However, traders should keep in mind that as long as they are able to catch those few good trades, they could be very profitable over the long run.

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