If you are a follower of Bollinger Bands, perhaps that is more than enough for you to seek profits from the market. This article from Learn Forex Trading will help you trade more simply with the Bollinger Bands indicator.
Structure of the Bollinger Bands indicator
Bollinger Bands is an extremely popular tool today. It combines the Moving Average and standard deviation. Developed by John Bollinger in 1983 to measure market price movements.
To increase trading efficiency, it needs to be combined with other basic trend indicators such as the stochastics indicator. Moving averages converge and diverge. As for Bollinger Bands, it is used to show current changes with market fluctuations. Confirms the trend, and warns about the possibility of continuing or stopping the trend. Consolidation periods, breakthrough growth volatility. But it only goes to local maxima and minima. Regarding structural components, it is a tool that combines Moving Average and standard deviation. From there, two upper and lower border bands are formed.
The structural component of the indicator is the moving average. Use default 20 sessions; SMA (20). Upper Band: the upper band usually has a standard deviation of 2. Calculated from 20 session price data. Located above the SMA (20). Lower Band: The lower band usually has a standard deviation of 2 and is below the SMA (20).
How to use Bollinger Bands
There are many ways to use Bollinger Bands, but the way it works is quite simple as investors will have to buy or sell when the price line touches its bands.
To reduce losses when the price line escapes the Bollinger Bands line for a short time. We should wait and see when the price line moves out of the line. Then the closing price jumped back into the Bollinger Bands line. This is an opportunity for investors to buy or short-sell.
There are 3 simplest and most popular methods of applying Bollinger Bands to trading:
- Trade when price is within range
- Trade when the price is at the support and resistance level of the trend.
- Trade when the Bollinger Bands appear to be a bottleneck.
Although many different trading strategies are using Bollinger Bands. But it depends on each trader’s trading style
Trade when the price is within the boundary of the two Bollinger Bands
This method is quite simple, maybe it is the simplest. Traders often buy when the price falls below the lower band. Conversely, investors sell or start selling when the price line is outside the upper band of this indicator.
Based on the principle that prices usually operate mainly in the range between the upper and lower boundaries. There is a trend around the SMA(20). Usually, the price line rarely moves out of the Bollinger Bands, so this application is quite simple.
- Buy signals: We Buy when the price touches the lower band of the indicator.
- Sell signals: We Sell when the price touches the upper band of the indicator.
As shown below is an example:
Normally we should wait when the price line moves outside the upper or lower boundary. Then the price closes inside, this is a good opportunity to enter an order. Because this is a way to limit losses when the price line breaks out of the BB line for a short time, this greatly reduces our risk.
Trading combining Bollinger Bands and trends
Although this method is simple, it requires more, that is, you need to determine where the support and resistance levels are. And besides that, you have to know how to combine it with trends.
Then combine with Bollinger Bands to give more accurate trading signals.
- Buy signals: enter a Buy order when the price is at the lower border of Bollinger Bands, plus near the uptrend line.
- Sell signals: enter a Sell order when the price is at the upper border of the Bollinger Bands, plus near the downtrend line.
After the price suddenly moves quickly, the price line tends to adjust to the trend line. And when the price line stabilizes, meaning the price fluctuations are small, the BB band narrows.
When the Upper Band and Lower Band contract. That is a warning sign that there is about to be a strong price fluctuation soon. Now when we combine it with the trend line, the possibility will be higher.
See more: How to register ICMarkets broker account
Trade when Bollinger Bands are tight
A common phenomenon of this indicator is the bottleneck phenomenon.
When the upper and lower edges contract together, they form a bottleneck. That is a warning sign that there will be strong price fluctuations soon. This bottleneck phase is also known as the sideway phase.
When the bands open, the price will enter the upper or lower boundary. That is also the new trend that is about to be formed. In the sideway phase, when the price touches the upper border it will go down and vice versa, when the price touches the lower border it will go up.
- Sell: we buy when the price closes at the upper boundary during the bottleneck period.
- Buy: we buy when the price closes at the lower boundary during the bottleneck period.
As shown below is an example of the EURAUD forex pair.
Immediately afterward, the market will adjust and the price line will tend to return to a consolidated state and will become less volatile. At this time, the components of Bollinger Bands are far apart, the price line is likely to tighten into a bottleneck shape in the future.
Besides, if you decide to dig deeper, you can learn more about Ichimoku and the Fibonacci sequence.
Conclude
Above, Learn Forex Trading has shared with you ways to apply Bollinger Bands to make your trading plans better. But in practice, to use Bollinger Bands well. Don’t forget to watch the news and events of the economic calendar to avoid times when the market fluctuates strongly, making the signals according to Bollinger Bands no longer accurate.