Basically the opposite of “Playing the Bands” and betting on reversion to the mean is playing Bollinger Band breakouts. Breakouts occur after a period of consolidation, when price closes outside of the Bollinger Bands. Bollinger Band Breakout through Resistance Potential Buy Signal A trader might buy when price forex dmi strategy above the upper Bollinger Band after a period of price consolidation. Bollinger Band Breakout through Support Potential Sell Signal Similarly, a trader might sell when price breaks below the lower Bollinger Band.
This strategy is discussed by the man who created Bollinger Bands, John Bollinger. Bollinger Bands can also be used to determine the direction and the strength of the trend. The reverse would be true during a downtrend, where prices would be in the lower half of the Bollinger Band and the 20-period moving average would act as downward resistance. Bollinger Bands adapt to volatility and thus are useful to options traders, specifically volatility traders.
The next page describes how traders might use Bollinger Bands to make volatility-based options trades. The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Traders try to buy options with low volatility in hopes that volatility will increase and then sell back those options at a higher price. Traders attempt to sell options with high volatility in hopes that volatility will decrease and then buy back those same options at a cheaper price.