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These days in that location are many unlike indicators available for trading the Forex market. And information technology seems every few months or and so a new trading indicator arrives on the scene. But many times, these new indicators are just some variation of the classical versions. Today we will discuss i of the most robust trading indicators that has stood the test of time. This is the Bollinger Bands indicator. We will hash out the basic elements of this indicator, and I will innovate you to a few profitable Bollinger Band trading strategies.

Bollinger Bands Analysis in Forex

The Bollinger Band is best described as an on-chart volatility indicator. It consists of upper and lower bands which react to changes in volatility. The ii bands wrap around the toll action at the upper and the lower extremes. When the volatility of a given currency pair is high, the distance betwixt the ii bands volition increase. When the volatility of a given currency pair is low, the 2 bands begin to shrink together. The indicator includes a standard twenty-flow Simple Moving Boilerplate which could be used to set entry and get out points of trades.

Bollinger Bands Calculation

As we noted, the Bollinger Bands trading tool consists of three lines – upper band, lower ring, and a middle line.

The middle line is a 20-menses Simple Moving Boilerplate. It is calculated by summing the closing prices of the terminal xx periods and then dividing the upshot by 20.

The upper line is calculated with a 20-period SMA of the toll action and its standard difference. The lower band is calculated the same way, using the 20-period SMA and its standard deviation. The default standard deviation used is ii. Then the Bollinger Band settings is normally expressed as Bollinger (twenty, 2).

How to Use Bollinger Bands

Although information technology is a primarily a volatility indicator, the Bollinger Bands is quite useful in discovering back up and resistance areas. The indicator consists of three lines and each of these could demonstrate support/resistance functions, however the double Bollinger Bands consisting of the upper and lower bands are usually better than the center line for this purpose.

There are a few signals that can be generated using the Bollinger Band. These signals respond to different price attitudes on the chart. Permit's get through each of these signals, discussing their potential.

Bollinger Band Squeeze

When the Bollinger Bands are shut to each other, then the trading indicator is conveying to u.s. that the volatility of the Forex pair is relatively depression. In this way, the trading volumes are typically low as well, and the pair is said to be consolidating or ranging rather than trending. This is what we telephone call a Bollinger Ring squeeze, because the bands are being "squeezed" tightly together. In most cases, we should avoid trading within very tight price ranges, because they provide significantly less profitable opportunities than during trending phases. The epitome below shows a classical Bollinger Bands Clasp.

Bollinger-Bands-Squeeze

An important concept to empathise in forex trading is that prices will typically motility from periods of low volatility to periods of loftier volatility and back once more.

As you run across, after the squeeze, the prices breaks out to the downside, and enters a sustained downtrend.

The Bollinger band clasp breakout provides a good premise to enter the market place when the toll extends across 1 of the bands. This would provide for support in favor of the range bound market coming to an finish and the likelihood of price entering into a new trend phase.

Price Touches the Lower Band

This is a standard Bollinger Bands bespeak, which indicates that the price is relatively low/oversold from the volatility standpoint. As a result, a bullish bounce could occur, creating a long trading opportunity. Think of this as a hidden support level based on an extreme volatility reading.

However, if the price starts falling quickly at the lower band instead, and the distance between the two bands continues to increase, so we must be conscientious of entering a long trade. When the bands are expanding and nosotros see strong price momentum below the lower band, this is a inkling that a bearish bias should still be in play.

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Toll Touches the Upper Band

The same scenario is in forcefulness but in the opposite management. We expect at the upper band equally a hidden resistance level based on an farthermost volatility reading. Even so, if the bands expand and the toll starts endmost candle after candle above the upper band, and then we await further bullish expansion.

Bollinger Bands Moving Boilerplate Breakout

The breakout in the Bollinger Bands Moving Average is a confirmation signal, which usually comes after a price interaction with the bands. If the price bounces from the upper ring and then breaks the xx-period SMA in bearish management, we get a strong brusque signal. If the cost bounces from the lower ring and breaks the xx-menses SMA up, then we go a stiff long indicate.

In this manner, the 20-period SMA breakout can be used to set leave points after entering a Bollinger Bands trade.

Bollinger-Bands-Signals

The Bollinger Ring nautical chart above summarizes the signals nosotros accept discussed. The blue circles point out crucial breakouts through the 20-period Uncomplicated Moving Boilerplate. The black pointer points out a Bollinger Bands clasp. The carmine arrow shows the price trending while breaking the lower Bollinger Band and the green arrow shows upwards trends on the upper Bollinger Ring.

Trading Bollinger Bands

Now that we are familiar with the structure and the signals of the Bollinger Bands, it is now time to shift our focus a fleck, and accept a expect at a couple of trading strategies that can exist incorporated using the Bollinger Bands.

Bollinger Bands with Candlestick Patterns

One reliable trading methodology utilizing Bollinger Bands, is combining Bollinger Bands and Candlestick assay. Basically, you could become long after the price touches the low Bollinger Band and then closes with a reversal candlestick pattern. And on the flip side, you could short the Forex pair when the price hits the upper band and then forms a reversal candle.

For this setup, you lot should place a finish loss order beyond the reversal candlestick. I prefer to close half of the trade when the price reaches the Bollinger Bands Moving Average. The reason for this is that candlestick patterns usually don't pb to big price reversals, only instead to shorter price moves in general. Nosotros tin stay in the trade for the other half of the position to take reward and any prolonged price movement. And so in this case, if the toll keeps trending in our management, we can utilise the Bollinger Bands Moving Average Breakout as an go out bespeak. However, keep in listen, if y'all get an earlier confirmation of another reversal blueprint, you don't want to wait for the SMA breakout. Just close the merchandise right away instead.

Let'southward now see how this strategy works.

Bollinger_Candlestick-Patterns

This is the 4-hour chart of the EUR/USD for Apr 1 – Apr 16, 2014. This chart illustrates a long position initiated by a reversal candlestick chart design.

The large black pointer on the chart shows a Bollinger Band squeeze. The bands are relatively close to each other squeezing the toll activeness and the indicator. Later, the toll starts to decline. Suddenly, the bands start expanding rapidly during the decrease. Soon we see the price action creating a bullish Tweezers reversal candlestick pattern, which is shown in the green circumvolve on the prototype. This is a strong long signal occurring at the lower band, and thus creates a nice opportunity to purchase the EUR/USD. A cease loss club should be placed below the lowest point of the Tweezers nautical chart pattern as shown on the prototype.

The price then starts increasing. Six periods later on the EUR/USD breaks above the 20-period Bollinger Band Simple Moving Average. This is when 50% of the trade could exist airtight. The cost continues its rally. On the style up nosotros see a few reversal candle patterns. However, they are not confirmed and nosotros disregard them equally a potential leave signal of the trade. At the end of the toll increment we see a Doji reversal candle pattern, which is followed by two bigger bearish candles. The close of the second surly candle could be taken as the beginning get out of the trade (Total Shut one). If yous decide that this signal is non persuasive enough, yous can wait for a breakout in the 20-period Simple Moving Average, which comes three periods later.

I would prefer to apply the Doji reversal followed by the 2 bearish candles as an get out indicate. Even if you call back the signal is not persuasive plenty it comes 8 hours earlier the weekly market close.

Therefore, this looks like the amend option to exit this trade. This style you are protected against weekend risk and big gaps with the Monday opening. In this case, if you decided to wait, yous would have fell victim to a thirty pips bearish gap.

Bollinger Band Breakout

In this trading strategy nosotros will approach situations when the price goes beyond the upper or the lower Bollinger Band. At the same time, the bands should be expanding, which indicates higher volatility. Furthermore, we volition include the Book Indicator in order to enter trades merely if volumes are high, or currently increasing with the direction of the trend.

If all these requirements are met, you tin open up a merchandise in the direction of the breakout. This tactic allows you to take advantage of rapid toll moves caused by high trading volumes and high volatility. Y'all should stay in these types of trades until the cost breaks the twenty-period Bollinger Bands Moving Average in the contrary direction. Let me now show y'all how this Bollinger Band trading system works

Bollinger-Bands-with-Volume-Indicator-breakout-trading

To a higher place you see the 4-60 minutes chart of the USD/JPY Forex pair for Mar 29 – Apr 12, 2015. The paradigm illustrates a short merchandise opportunity based on signals from the Bollinger Bands indicator and the Volume Indicator.

At the starting time of the chart we see the price moving below the 20-period Bollinger Band SMA. All the same, the two Bollinger Bands are very tight and the volumes are relatively depression. Therefore, we would stay out of the market place for the time being. Of a sudden, the two bands offset expanding which is shown past the pink lines on the image. At the same time, the three blackness arrows point toward an increase in the trading volumes of the USD/JPY. For this reason, nosotros consider this as a nice opportunity for a short position in the Yen.

You should always utilize a stop loss on this merchandise, and it should be located above the twenty-menstruum Simple Moving Boilerplate.  This would act as a trailing finish, which means that you lot would constantly adjust the cease in the surly management.

According to our strategy, nosotros should stay in the trade as long as the price is below the 20-flow SMA. After we curt the USD/JPY the price starts increasing the intensity of its downward movement. The decrease of the USD/JPY is abrupt and continues for 6 days.

On Apr 7, 2015 the USD/JPY reaches its lowest point and starts ranging afterwards. The range continues towards the 20-menses Simple Moving Boilerplate, which gets broken up on April 12. Based on the rules of the strategy, this would be the exit bespeak and the merchandise should be airtight out at this point.

What is the All-time Bollinger Band Strategy?

In my stance, the better Bollinger Bands trading strategy is the second setup I showed you. The reason for this is that Volatility and Volumes are mutually connected. Therefore, their importance to each other is essential, which in plow, creates reliable signals for trading. When the price is moving strongly across one of the bands during loftier volatility and high trading volumes, and so we are probable to meet a big price movement on the horizon.

In addition, the rules for entering and exiting a trade and clear and straight forward, which makes this Bollinger Bands strategy easy to implement.

The Bollinger Bands with candlestick patterns is a well-regarded strategy equally well. However, information technology is less likely to produce a big price move.

Therefore, I suggested the 50% close on the SMA breakout in order to avoid risk of contrary price moves. Some traders prefer this blazon of trade setup, which is quite fine, so long as the trader understands that this is more than of a hateful reversion strategy and requires stricter risk management controls.

Determination

  • The Bollinger Bands is a volatility based indicator.
  • Information technology consists of an upper and a lower band, which react to changes in volatility, and a 20-flow Simple Moving Boilerplate.
  • The calculation of the two Bollinger Bands involves a 20-catamenia SMA on the closing prices on the chart and a standard deviation on the SMA, usually two standard deviations is the normal setting.
  • The signals which could be attained from the Bollinger Bands trading indicator are:
    • Bollinger Bands Squeeze: The 2 bands are relatively compressed and tight, and we are endmost monitoring the eventual breakout direction and volatility expansion.
    • Price Touches the Lower Band: This is a classical buy betoken. Nevertheless, if the toll moves below the band, then the decrease is probable to proceed on loftier price volatility.
    • Price Touches the Upper Ring: This is a classical sell indicate. Even so, if the cost goes above the ring, so the increase is likely to continue.
    • Bollinger Bands Moving Average Breakout: This is a standard Moving Average point. When there is a Bollinger Bands SMA breakout, we get a betoken in the management of the breakout
  • Ii of the best Bollinger Bands trading strategies are:
    • Bollinger Bands with Candle Patterns
    • Bollinger Bands Breakout with Volume Indicator
  • The preferred Bollinger Bands trading setup is the Bollinger Bands Breakout with Volume indicator, because:
    • It has clearly stated rules and it is like shooting fish in a barrel to implement.
    • Volatility and Volumes are mutually connected, which gives reliable signals.
    • It leads to bigger and longer-term price trends.

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