How to Use with Bollinger Band in Forex Trading

The trading technical analysts and traders in all markets, including forex, use Bollinger Band indicator. Because currency traders seek incremental price movements to earn. Immediately spotting volatility and trend changes is critical to establishing a profitable approach.

What are Bollinger Bands and How Do You Use Them?

Bollinger Band is a technical analysis indicator in forex trading. It helps to evaluate whether a financial market instrument is overbought or oversold, as well as to analyze volatility. On a trading chart, Bollinger Bands are of three lines. The trading indicator’s middle line is the price of the instrument’s simple moving average (SMA). Which is the average of the price over a period of time. This is usually for 20 days. The SMA plus two standard deviations makes up the upper band. The SMA minus two standard deviations is the lower band.

A Bollinger Band indicator can be found on either side of the SMA. Bollinger Bands resemble an envelope around the instrument’s price. The standard deviation determines the widths of the bands. The volatility of an instrument’s price changes is measure by its standard deviation. The default value is 2.0.

How Bollinger Band Indicator Works

In forex trading the likelihood of a significant price move in either direction increases when the bands narrow during a period of low volatility. This could be the start of a trend. Keep an eye out for a false move in the opposite way that reverses before the true trend starts.

Volatility rises in forex trading when the bands diverge by an unusually high amount. And any existing trend may be ending.

Prices in forex tend to bounce around within the bands’ envelope, touching one band before moving on to the next. These swings helps you discover potential profit objectives. If a price bounces off the lower band and subsequently crosses above the moving average, the profit goal shifts to the higher band.

During strong trends, price might surpass or hug a band envelope for extended periods of time. If your momentum oscillator shows divergence, you should do more study to see if taking additional profits is a good idea for you.

In forex trading when the price breaks out of the bands, a significant trend continuation is likely. However, if prices instantly return to within the band, the implied strength is nullified.

Bollinger Bands Calculation in Forex Trading:

Bollinger Bands are made up of three distinct lines. For the middle band, one of the most typical computations employs a 20-day simple moving average (SMA). The upper band is the middle band and multiplying it by twice the daily standard deviation. The lower band is by subtracting the middle band from two times the daily standard deviation to arrive at the lower band.

The Bollinger Band Formula:

BOLU=MA (TP,n)+mσ[TP,n]

BOLD=MA (TP,n)−mσ[TP,n]

Where:

BOLU=Upper Bollinger Band

BOLD=Lower Bollinger Band

MA=Moving averageTP (typical price) = (High+Low+Close) ÷3

n=Number of days in smoothing period

m=Number of standard deviations

σ [TP,n]=Standard Deviation over last n periods of TP​

Bollinger Bands Indicator Examples

You can see in this chart of American Express from the beginning of 2008. That the price action was mostly touching the bottom band. And the stock price fell from $60 in the depth of winter to approximately $10 in March. The price action cut through the centerline in a handful of instances (March to May and again in July and August). But for many traders, this was not a buy signal because the trend had not been broken.

band-breakout-strategy
Bollinger Bands trend

The Bollinger Bands trend reversed to an uptrend. The early part of January in the 2001 chart of Microsoft Corporation, but look at how slowly it did so. The stock price had moved from $20 to $24 and then between $24 and $25. Until the price action passed over the centerline, giving some traders confirmation of the trend reversal.

This isn’t to argue that Bollinger Bands aren’t a reliable indication of overbought or oversold conditions. But charts like the Microsoft layout from 2001 serve as a useful reminder. That we should start with simple moving averages and trends before moving on to more complex indicators.

Bollinger Band in Forex Trading Strategy
Bollinger Band in Forex Trading Strategy
Double Bollinger Band Strategy:

Now that we have a better understanding of this technical signal, let’s look at our first Bollinger Bands method. Kathy Lien, a well-known Forex analyst and trader. Popularized the Double Bollinger Band Strategy. Which she described as her favourite trading approach in her book, ‘The Little Book of Currency Trading.’

The Double Bollinger Band Strategy is easy to understand. It can be apply to any actively traded asset on large liquid markets including Forex, equities, and commodities. It necessitates the addition of two sets of Bollinger Bands to a single price chart, as the name implies.

Bollinger Band Scalping Strategy:

In financial markets, the phrase “scalping” refers to making very quick trades based on real-time market information. The goal is to generate tiny but rapid profits by purchasing or selling stocks, currencies, or financial instruments within minutes or hours of each other.

A 20-day moving average would be far too historical to be meaningful in this case, so instead, a Bollinger band scalping approach is used, with the moving average time periods compress to indicate how the market is behaving right now. 

When to Buy:

The Bollinger bands are nearly flat, with only a few ups and downs.

AND the bottom band is touch or cross by the market price.

When to sell:The Bollinger bands are nearly flat, with only a few ups and downs.

AND the top band is touch or cross by the market price.

The Squeeze Strategy of the Bollinger Bands:

The Bollinger Band Squeeze Method is a Bollinger Bands strategy that employs two indicators:

Bollinger Bands are a type of band describe (20,2)

Admiral Keltner’s MetaTrader Supreme Edition is include with Admiral Keltner’s MetaTrader Supreme Edition.

M30-D1 charts are recommend for this Bollinger bands trading method, which may be used on any instrument.

Counter Trending with Bollinger Bands:

Counter-trending is a trading strategy based on the assumption that the present market trend will eventually reverse. This approach is vital for next market traders to be aware of since it may be included into your particular trading strategy. Some traders compare it to betting on black after a streak of red numbers has been announced in roulette. It’s a medium-term plan, and Bollinger band approach is typically crucial to doing it properly. Bollinger bands, on the whole, are fairly accurate in predicting when the market’s direction reverses.

Trading against the current trend may be quite rewarding, since it allows you to profit from a new trend before the rest of the market catches up. Of course, this is a hazardous technique because there is no assurance that the market will flip when you want it to. When employing the Bollinger band approach, risk control strategies are essential.

Bollinger Band Breakouts:

When using the Bollinger bands approach, breakouts are important to watch out for. When the Bollinger bands have come together and the market has enjoyed a period of low volatility, a breakout might occur.

A breakout occurs when the market closes at a price that is outside of the Bollinger bands. This frequently indicates that the price has moved beyond one of the support or resistance lines. If the price breaks out above the upper Bollinger band, a trader may elect to invest, since this might signal the start of a strong upward trend.

A breakthrough below the bottom Bollinger band, on the other hand, might be a good opportunity to sell, as it could signal the commencement of a major negative trend in the market price.

In summary, while every technique has flaws, Bollinger Bands have emerged as one of the most useful and often used instruments for identifying extreme short-term pricing in a securities. Buying when stock prices fall below the lower Bollinger Band might help traders profit from oversold conditions when the stock price rises toward the moving-average line in the middle.

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