How to Use “Bollinger Bands” to Trade Forex?
- August 24, 2021
- Posted by: Daniel Richard
- Category: Forex Trading
John Bollinger developed this essential indicator, the Bollinger band, which is used for measuring the volatility and also identifying the overbought and oversold conditions in the market. This indicator also indicates the loud and quiet position. This band becomes shorter when the market is slow; on the other hand, when the market is loud, the band becomes elaborate.
In Bollinger bands, a particular mathematical formula is used that is very easy to calculate. Therefore, in this article, you will get an expanded knowledge about “how to use Bollinger bands” for a successful trade.
What are “Bollinger Bands”?
Three types of bands are included in Bollinger bands which are-
- The upper band
- The middle band
- And the lower band
The upper band indicates the high volatility and expanded price action. On the contrary, the lower band indicates the low volatility and contracting market position. You have already noticed that the central line shows the simple moving average (SMA).
A middle band refers to the twenty days SMA, which is the standard “Bollinger Bands” formula. For calculating the above and below lines, the market volatility is used. The market volatility is directly related to the central line or middle band. The calculating formula of “Bollinger Bands” are given below
- Middle line: It is the simple moving average of twenty days.
- The upper band: twenty days simple moving average + (twenty days standard deviation × 2)
- The lower band: twenty days simple moving average – (twenty days standard deviation × 2)
In a Bollinger band, the 20 days moving average is shown, and the upper and lower band have been set away from the middle band. Between the upper and lower bands, at least 85% of the price data will be moving for the settings of Bollinger bands. But the settings of these three lines may adjust according to traders’ different needs and trading strategies.
Around 68% of the price movement has occurred for one standard deviation. In the same way, if upper and lower lines are two standard deviations, around 95% of price movements will occur.
You can try different kinds of standard deviations, but before trying the deviation, you must be familiar with how they work. But it is not so important to be an expert in “Bollinger Band”. An overall knowledge about “how to use Bollinger bands” is enough for trading.
How to Use “Bollinger Bands” in Trading?
Not only are “Bollinger bands” used in traditional financial markets, but they are also used in cryptocurrency trading. You can use “Bollinger Bands” in different ways, but it may not be preferable to use them only as a stand-alone instrument. So, Bollinger bands should be used along with other technical analysis indicators.
It is essential for traders that if the market is above the simple moving average line, this position is safe because it is now overbought. In the same way, if the market price touches the upper bands several times, generally, it may suggest the resistance level that is suitable for selling.
On the contrary, if the price falls significantly and touches the lower band several times, the market will reach an oversold position, and you will find a support level. The support level is suitable for traders to buy.
As a forex trader, you can use the Bollinger bands with other technical analysis tools for setting your buying and selling targets. You may get an overview of past price conditions, which represents the overbought and oversold signals.
For predicting the volatility conditions of the currency or asset value, “Bollinger Bands” extension and reduction are essential. When the price runs away from the central line, the price of this asset is more volatile, but when the price of an asset moves toward the middle band from the lower band, the price of this particular asset is less volatile.
Therefore, the “Bollinger Bands” are suitable for short-term trading for predicting the moments of high and low volatility. Some traders believe that the market may be closed while reaching the market price to the uptrend. In contrast, the market is ready to make an erratic movement to reach the downtrend.
The Bollinger Bounce
The market price always tends to touch the middle bands, and it is the essential idea in “Bollinger bands”. When the value of an asset or currency touches the upper bands, it will start to return to the middle line; in the same way, during the price reaches the lower line, it will also begin to go towards the middle band. So, the ultimate destiny of the Bollinger band is to go towards the middle band.
Seeing a Bollinger band chart, you can easily identify the subsequent movement of the price. If the current price is at the upper point, for the following action, it will go down. On the other hand, if the current price is lower, the price will start to go up after the next move.
If you use a long-time frame, these bands will tend to be stronger. Many intellectual traders have developed systems, and this developing system also progresses on Bollinger band bounces. When the market is running, and there will be no exact direction, this is the best time for using this strategy in forex trading.
You should avoid the Bollinger bounce at the time of expanding the bands, which means the price may not move within a range. Moreover, when the bands are stable, this is the most acceptable time for using the Bollinger bounce. You have to observe the market condition very carefully, and according to the condition, you should decide on successful trading.
Bollinger band squeeze is introduced by the Bollinger band, which is designed by John Bollinger for making a profit from the market. There are two types of Bollinger squeeze such as long squeeze and short squeeze.
Generally, traders take long positions in a Bollinger Upper Band, the candlestick closes above the 20 periods. On the other hand, traders can take a short position when the candlestick closes under the twenty-period Bollinger Lower Band.
Bollinger Squeeze is more independent than Bollinger Bounce. The breakout is getting ready to happen when the bands are squeezing.
Breakout happens two times. First, when the candles cross the upper band and continuously go up. Secondly, when the candles cross the lower band and continuously go down. A breakout occurs for abnormally increasing or decreasing prices.
Bollinger squeeze is used for identifying the change of price. This strategy is designed for you to observe the changes as much as possible. You can use a 15 minutes chart. You may lose if you start to follow this strategy closely without considering any risks and limits. So, be careful about your capital and know the exact system.
For the false breakouts, the period of low volatility is uncomfortable for trading. When the low volatility is looking safer for a breakout, the squeeze emphasizes a record period of low volatility.
John Carter popularized the following variation of Bollinger squeeze. He combined the Bollinger band strategies with the Keltner Channel study for making this strategy. The Keltner Channel is also based on volatility like the Bollinger bands indicator. But there is a fundamental difference between them. You will find the difference for calculating the upper and lower limits. Therefore, both indicators use the charting platforms.
You can use the default Bollinger squeeze setting for both the Keltner Channel and Bollinger band indicators. It is most crucial that this default setting for the Bollinger band is 20 days moving average with two standard deviations. In contrast, in Keltner Channel, the default setting is the 20 days moving average with a 1.5 X ATR multiplier.
Thus, before using the Bollinger bands indicator, the traders must understand how to use Bollinger bands while trading. Bollinger bounce and Bollinger squeeze are the two common strategies in Bollinger band indicators.