Scalping is the strategy of quickly entering and leaving deals over short periods in order to capitalize on little price fluctuations. Scalping, when paired with Bollinger Bands, can give traders a dependable way to profit from market noise and intraday volatility.
We’ll look at how to use Bollinger Bands and other technical indicators to scalp successfully throughout this article. By the end, you’ll know what to look out for regarding setups, trade management concepts, and possible risks while using this strategy. Let’s get started!
What Are Bollinger Bands?
John Bollinger invented Bollinger Bands, which are bands of volatility positioned above and below a basic moving average. In response to changes in price, they grow during periods of high volatility and contract during periods of low volatility.
The bands are drawn at a predetermined number of standard deviations, commonly two standard deviations, from a 20-period simple moving average (SMA). Prices that cross into the upper or lower bands suggest that the price is trading at a high point in relation to its recent price behavior.
When prices drop inside the bands after reaching an extreme, it may indicate that a bounce is coming. For fast profits, smart traders might take positions in the direction of the anticipated bounce. Therefore, bands offer objective indications of entrance and exit based on statistical likelihood.
Finding Bollinger Bands Setups for Scalping
There are a few main setups traders watch for when scalping with Bollinger Bands:
- Reversals off the Upper/Lower Band: As prices touch an extreme band, enter a position for a scalp in the opposing direction of the touch with the expectation of a bounce back within the bands. Tight stops protect against trend continuations.
- Squeeze/Breakout: When volatility contracts and the bands converge, it sets up for a potential break of either band. Traders enter when the break occurs scalping in the direction of the breakout. Â
- Fakeouts: Occasionally prices will touch a band but fail to sustain the bounce. Scalp the fakeout moves counter to the band touch for quick profits.
- Retests of a Broken Band: After a band breakout, watch for retracements back to retest the previously broken band. Scalp the retests expecting a continuation of the primary breakout trend.
Additional Technical Indicators to Pair With Bollinger Bands
Combining Bollinger Bands with one or two additional technical indicators can enhance the accuracy of scalping setups:
- Relative Strength Index (RSI) – An oversold or overbought RSI reading coinciding with a band touch increases the probability of a bounce. Scalp against the extreme RSI.
- Volume – Look for increasing volume on bounces off the bands for extra confirmation of a potential reversal scalp. Fading moves on low volume increases risk.
- Chart Patterns – Common reversal chart patterns like head and shoulders tops/bottoms coinciding with band squeezes offer high probability setups.
Weaving together multiple technical factors before entering trades helps validate the quality of potential Bollinger Band scalping setups. Relying on single indicators introduces more risk.
Trade Management When Scalping With Bollinger Bands
Proper trade management is crucial when scalping with Bollinger Bands. Some best practices include:
- Set Tight Stops – Place stops within the nearest band to protect against potential trend continuations. Stops should be small, around 5-10 pips on forex.
- Take Quick Targets – Scalps typically aim to capture 2-4x the risk per trade. Take partial or full profits quickly on the first 1-2 ticks of movement.
- Use Brackets – Place a stop and profit target simultaneously for set-it-and-forget-it scalps. Automate execution to avoid emotional decision-making.
- Scale-Out – For bigger moves, scale out of positions by taking partial profits at logical chart levels like the 21 or 55-period EMAs.
- Monitor Positions Closely – Scalping demands constant watch. Exit losing trades quickly if stops are hit rather than hoping for a bounce.
- Control Risk Per Trade – Risk no more than 1-2% of account per scalp to avoid blowing up from multiple losses.
Strict trade management underpins all strategies. It’s critical when scalping with high trade frequency.
Challenges and Risks of Scalping with Bollinger Bands
No strategy is perfect, and traders should be aware of potential downsides when scalping Bollinger Bands:
- Slippage and Spreads – Frequent ins and outs incur greater costs that can eat away at profits on small moves. Use limit orders when possible on active stocks/forex pairs.
- News/Gaps – Unexpected news events can trigger gaps through bands, invalidating potential bounce setups. Avoid volatile periods with scheduled announcements.
- Trending Markets – Scalping reversals off the bands may fail in strong trends as bands widen. It works best in choppy/consolidating price action with frequent touches.
- Fatigue – The mental focus required to scalp all day long eventually fatigues traders into costly mistakes if over-applied. Balance with other strategies.
- Commissions – High commission costs on futures and forex trades may surpass margins from frequent small scalps. Consider commission-free instruments.
As with any active strategy, scalpers must manage risks diligently, trade suitable instruments, and avoid chasing the markets on days with reduced opportunities. Strategy, discipline, and risk management are paramount.
Example Trades Using Bollinger Bands
Let’s examine a few Bollinger Band scalping trades on crude oil futures (USO ETF) to illustrate the strategy in action:
- Reversal off Upper Band – Oil touches the upper band on expanding volatility. Entered short on the touch for a scalp back within the bands. Target hit for a quick 5-point gain. Â
- Squeeze Play – Bands converged on low volatility. Broke above the upper band on increased volume. Scalped long for the breakout, targeting the top band edge. Grabbed 3 points.
- Fakeout Reversal – Oil poked above the upper band but saw selling pressure. Scalped the fakeout short back within the band for a 2-point profit.
- Retest of Broken Band – After a lower band breakout, oil is retraced to retest the level. Scalped the long side retest for a 3-point gain.
These examples illustrate the core Bollinger Band setups scalpers can trade consistently for small profits. Over many trades, the strategy compounds gains significantly.
Taking the First Steps with Bollinger Band Scalping
To get started scalping Bollinger Bands effectively you should paper trade for several months to refine strategy and track stats without risk. Pay attention to sources of losses. Â
Start small on a micro account when live to gain experience handling emotions with real money on the line. Try to trade highly liquid forex pairs or futures contracts only to minimize slippage and stall risks. Avoid widespread forex exotics. Also, backtest the strategy over historical data to understand win rates and best/worst market conditions for applying it.
Automate trades with a broker’s trade execution platform to avoid lapses in discipline. It’s important to develop a trading plan incorporating all aspects discussed and get feedback from experienced traders. Be patient, as it takes many months if not over a year of live trading to master this style of market participation fully.
Traders may consistently profit from short-term noise and volatility in the markets by using this tried-and-true technical strategy with constant practice over time. Success with scalping requires attention to detail, practice, and perseverance.
