Volatility Breakout

FX:JPN225   Nikkei 225 Index
Bollinger Bands indicator is very interesting technical tool and perfectly shows volatility changes of financial instruments. Usually, when we have range market conditions, low volatility and price movement in a narrow channel give us a good trading opportunity. Periods of low volatility are followed by periods of high volatility . Bollinger Bands form the border of this range and provide possible levels for opening trades. When price breaks the boundaries of the range, we could see good movement and often the beginning of a new trend. We have to wait for volatility breakout everytime, when Bollinger Bands become narrow.

Once a candle closes outside Bollinger Bands and the lines start to diverge, we get a signal for opening trades. But note, we must have confirmation from ADX and MACD indicators for this breakout. Only after that we place a pending order above the high of the signal candle for long trades and below the low for short trades. The signal candle is the candle where we meet the following conditions: the candle closes outside the range formed by Bollinger Bands , the lines of indicator diverges, ADX rises and MACD confirms the direction of the trade.

We have an upcoming stop loss and profit target, which could be 2 or 3 times more then the size of stop loss. That allows us to pass easily a series of losing trades. Also note that the closer the bands - the higher price can go after the break. The growth of the ADX is necessary to enter the market. It indicates that the impulse grows and filters out false breakouts.
Comment: Here is step by step instruction, follow it:
1. We are looking for a market that is trading in range. Moving Averages intertwined, ADX is below 20 or falls to this level
2. The bands must get closer and the narrower the range the greater potential for price movement after the break
3. Wait till the candle breaks one of the bands and closed outside Bollinger line in that conditions the bands are to diverges
4. The indicators must confirm the break: ADX rises and MACD confirms the direction of the trade
5. We place the pending order higher or lower the signal candle
6. Place stop order below Moving Average with period 20 if buy and above if sell
7. Profit target should be twice more than the size of stop loss. This is the easiest way to define the profit targets.

This type of signal can be applied to 15 minutes, hourly and daily charts. Trades with profit are going to be more, if take into consideration the trading conditions of the higher time frame as well as support and resistance levels.
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