Are you searching for the Exponential Bollinger Bands? In this article, we will show the variant of the most popular technical analysis indicator.
As you know, the Bollinger Bands are generally calculated with a simple 20-period mobile average. Using an exponential moving average will not substantially change the behavior of the Bollinger Bands.
The most important characteristics of the Exponential Bollinger Bands indicator are:
When the market is flat, the bands will stay much closer to prices.
When the volatility is high, the bands move away from prices faster.
In practice, the Exponential Bollinger Bands are more reactive to price changes. In this article, we will show you why this occurs and how to take advantage of this.
At the end of the article, you can download for free the indicator. We provide the Exponential Bollinger Bands for many trading platforms: TradeStation, MetaTrader4, and MultiCharts.
Difference between Bollinger Bands Simple and Exponential
The Bollinger Bands are calculated on a simple moving average in every trading platform, while the Exponential Bollinger Bands are rarely present.
The Bollinger Bands indicator is a moving average on which we calculate two bands that move based on a standard deviation value.
Changing the moving average used to calculate the Bollinger Bands changes the character of the indicator.
Exponential Bollinger Bands will be much more reactive than the standard version when the prices move fast.
Bollinger bands indicator is nothing more than a moving average with two bands.
Many traders prefer to use the more reactive indicator because, in theory, it should be able to provide entry signals early.
In reality, using an exponential average will certainly modify the number of trades, but it is not sure that the system will improve.
An exponential indicator might fit well with certain tools or strategies, so the rule is always to try and do backtests when possible.
Why are the Exponential Bollinger Bands more reactive?
An exponential moving average is calculated by giving more weight to the latest prices, while a simple moving average treats all prices in the same way.
In this graph, you can see the difference between a moving average and an exponential moving average:
As you can see, an exponential moving average follows the prices more closely.
In contrast, the simple moving average crosses the price only during the most significant changes in direction.
The middle band of a Bollinger Bands indicator is a Moving Average, so you’ve already seen what the behavior of the middle band of your Exponential Bollinger Bands indicator will be.
Now we can understand the difference between the two bands calculated with the exponential system.
As you can see, as soon as the price speeds up, the exponential bands tend to move faster in the same direction. This causes fewer touches between the price and the bands in these phases.
- The Exponential Bollinger Bands bands will be more in touch with prices in a market range than the standard version.
- In the volatility explosion stages, exponential bands will tend to move faster from prices.
Exponential Double Bollinger Bands Strategy
If you don’t know the double Bollinger Bands strategy, we will quickly explain what it is. In practice, two Bollinger Bands with different standard deviations are inserted in the same chart. For example, we can use these standard deviations 1.5 and 2.5.
This is the result in the EurUsd H1 chart:
As you can see, they form two external channels, which can be considered as zones of price extremes.
Generally, this strategy is used for trading in the trend’s direction. For example, when the price is between the two bands at the bottom, you should only open short positions.
When the price lateralizes and then will immediately explode in an external channel of the double indicator, the bands’ reactivity to price movements is crucial.
The channels formed by the Exponential Bollinger Bands move faster, making it more difficult for the price to stay inside it.
In a strategy such as the one described, Bollinger Bands exponential moving averages would result in fewer trades because there will be fewer signals.
It will also be possible to avoid some false signals caused by the Bollinger Bands’ slowness calculated on a simple moving average.
However, there is always the risk of entering the market late compared to the classic strategy. Entering late on a signal that bets on the continuation of a price movement are not very good.
Which of the two versions to use in this strategy? Answering this question is very difficult without examining the financial instrument you intend to trade.
The greater reactivity of the Exponential Bollinger Bands could lead to better results by filtering some false signals. Still, we must not underestimate the risk of being late in our entries.
Swing Trading with Exponential Bollinger Bands
A swing trading strategy open trades contrary to the movement of the price. You only have to wait for the price to close above one of the two bands and then open a trade in the opposite direction.
These strategies are generally called swing trading or mean-reverting or trend reversal precisely because it goes against the current price movement.
Many traders use these strategies in intraday and low volatility ranging sessions; it can work well and generates interesting trades.
Using an Exponential Bollinger Bands, in this case, will also limit market entries because the bands will react more quickly to price movements.
It will be much more complicated for the price to break one of the two bands, and when this happens, the signal will be much stronger.
A late entry would not create problems as in the previous case because it’s a reversal strategy, and our entry timing performance will improve.
The best thing is to analyze the tool by performing backtests to understand which version reacts best to the selected financial instrument’s selected strategy.
A backtest does not guarantee results in the future, but it can be at least a starting point.