The Bollinger bands can help identify overbought and oversold market conditions, protecting you against placing any orders that could lead to losses. It is also an effective tool to locate breakouts and breakdowns in a volatile market and provides confirmed market signals and price actions when used with other indicators.
Bollinger Bands in Forex trading is a technical analysis chart indicator used for measuring market volatility. It is plotted two standard deviations above and two standard deviations below the currency pair’s average price. This helps the traders to understand whether the currency pair prices are low or high on a relative basis and in turn letting them know if the market is overbought or oversold.
The Bollinger Bands tend to squeeze when the market is less volatile and send a sharp price move signal in the market's direction. Such price moves lead to a price trend. However, when you notice the bands separating rapidly, it sends a more volatile market signal that leads to an end in an existing trend. The Bollinger Bands consist of three lines:
How do these bands send a signal to the trader?
As soon as the currency pair prices go below the lower band of the Bollinger Bands, they are said to have fallen a lot more than expected and tend to bounce back. This results in an oversold market condition that signals the trader to buy more of that currency pair and profit from the increasing prices thereafter.
In the Overbought Bollinger Band trading strategy, the currency pair prices shoot up and increase beyond the upper band of the chart pattern. This results in an unexpected increase in the prices that is followed by a price reversal. This sends an exit signal to the traders in order to maximise their profits and minimise losses by selling the currency pair at the highest available price.
The Squeeze Bollinger Band trading strategy occurs whenever the currency pair prices move extensively in the market, and immediately after the rapid movement, they start to move sideways to consolidate tightly. In this situation, both the upper and lower bands come closer to each other, telling the trader that the market is volatile. The prices then make a much significant move in either the upward or downward direction, with high volume. The prices move in the direction of the breakout, sending profitable entry or exit signals to the trader.
The Bollinger Band Swing trading strategy provides the traders with the most profitable entry and exit trading levels. In this strategy, it is best advised for the traders to place trades right after the two bands come together.
After the squeeze in both bands, the currency pair prices are expected to make a large jump in either the downward or upward direction
Bollinger Bands provide you with accurate entry and exit signals in the Forex market. It tells you if the market is overbought or oversold,
which you can use to either buy more of the currency pair or sell all of it together. With Blueberry Markets as your trading partner,
you can learn more about the Bollinger Band trading strategies in both volatile and non-volatile markets.
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