Dear Traders,

first of all, I want to wish you a Happy New Year 2015, let’s make it successful together!

Last month, I wrote about my Bollinger Band Strategy for Trending Markets – the full article is here:

I want to thank community user garisan from Spain for asking a very good question about trade management due to the dynamic nature of the Bollinger Bands and promised him to explain it in more detail. This is what my second article is about.

The In-Trade-Management Strategies pointed out here, do not only apply to my mentioned strategy, but you can use them with modifications in your own trades. In this article, I will explain it with my Bollinger Band Strategy for Trending Markets. The trade entry is described in the previous article. At this point we entered the trade, placed our initial stops and targets and we are now in the trade.

First Example:

Let’s begin with the first illustration. I picked a 15 minute chart of EURUSD. We identified the uptrend, our middle band was hit and entered the trade with a long. We set our initial stop and initial target.

Our initial risk reward ratio is 1:1. During the trade the lower Bollinger Band rises. As this happens, we rise our stop with every new formed bar. As we rise our stop the risk reward ratio moves to around 2:1 or 3:1 in our favour. We have several options now:
  • at the point where our risk reward is 2:1 we can just leave the trade as is and be happy that it moved to our favour
  • the other option is to add to our position at a slightly higher price. With the better risk reward ratio we keep the initial risk dollar wise, which is a certain percentage of our account equity.
Regarding the Profit Target we have similar options:
  • as the upper band moves down, we can adjust our profit target. If the lower band remained the same, this moves the risk reward ratio down to 1:0.9 or 1:0.8
  • if the upward move is sharp as in the illustrated trade, I prefer to keep the initial target, even if it is higher than the upper band
Our main move should always be to move the stop closer to our trade entry as soon as possible as it minimizes our risk. Never ever move the stop away from your trade entry.

Second Example:

Another special situation I like to describe is again on a 15 minute chart of EURUSD. We identified the uptrend, our middle band was hit and we entered the trade with a long. Our initial stop and target are set.

As we are in the trade, we see both bands narrowing. In this case, I move both, the SL and TP, closer to the trade entry. After a couple bars we see that the former identified uptrend is not valid any more and we entered a sideways market. You have again two options here:
  • Wait until either the TP or SL is hit. In the illustraded case the adjusted TP was hit, but this is purely luck in my eyes and has nothing to do with our system. The uptrend does not exist anymore, the chances entering a sideways market, a downtrend or uptrend are about the same.
  • The wiser option is to exit the trade at breakeven, as soon as you can. Whenever your trade entry conditions are not valid anymore, you are in a 50:50 probability area. This is not the situation we want to be in.
Third example:

A third example would be a trade with widening bands after the trade was entered. I cannot provide you with a chart for that. Why? It is non existent. If you have an identified uptrend or downtrend, the Bollinger Bands are already widening and you are waiting for the trade entry. If you entered the trade, the band size stays the same and more importantly the band at the stop line is moving in your direction. If the bands are still widening after trade entry, your TP was already hit (and you wait for the next trade entry).

As said before, keep in mind you you never move a stop away from your trade entry, because you increase your account risk.

I really like to describe the in and outs of this strategy. As always, keep your questions rolling, vote for my article to see me in a presentation :-)

Green pips to all,

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