What are Bollinger Bands?
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.
Understanding Bollinger Bands
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.
How do Bollinger Bands work?
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:
- The simple moving average line
- The lower band, two standard deviations below the simple moving average line
- The upper band, two standard deviations above the simple moving average line
How do these bands send a signal to the trader?
- When the currency pair prices touch the lower band and cross the moving average line from above, the upper band is known to be the profit target in that time period
- When the currency pair prices touch the upper band and cross the moving average line from below, the traders receive an entry point signal at the lower band
How to calculate Bollinger Bands?
- Calculate the 20-day simple moving average by adding the closing prices of the currency pair in the last 20 days and dividing it by 20 (time period).
- Calculate the standard deviation of the currency pair price that you want to trade by determining how far away each day’s closing price is from the average and squaring the sum of all deviations before dividing it by the time period. The standard deviation will be the square root of the answer obtained.
- To obtain the lower band, multiply the standard deviation that you have calculated by 2 and subtract this number from each currency pair price along with the simple moving average price.
- To obtain the upper band, multiply the standard deviation obtained once again and add this number from each currency pair price along with the simple moving average price.
- When you have the upper and lower bands ready, you can monitor the currency pair prices moving along the bands.
- The closer the currency pair prices move to the upper band, the more overbought is the market condition.
- However, the closer the currency pair prices are to the lower band of the chart, the market is known to be more oversold.
Top 5 Bollinger Band Trading Strategies
1. Oversold Bollinger Band Trading Strategy
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.
2. Overbought Bollinger Band Trading Strategy
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.
3. Squeeze Bollinger Band Trading Strategy
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.
- A stop-loss order can be placed right outside the tight consolidation at the breakout’s opposite side to minimize losses
- A buy or sell order can be placed as soon as the price goes beyond the upper band or below the lower band
4. Swing Trading Bollinger Band Trading Strategy
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.
- Both bands must face the opposite direction while coming together to ensure that you can benefit from the swing trading strategy
- Since two bands coming together means that the market is less volatile, it is always followed by larger price moves in the future
After the squeeze in both bands, the currency pair prices are expected to make a large jump in either the downward or upward direction
- If the existing market direction is towards, the prices are tended to drop even further, sending a sell signal to the traders
- If the existing market direction is upwards, the prices are expected to increase sharply, sending a buy signal to the traders
Trade with Bollinger Bands to enhance your trading opportunities
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.
Sign up for a live account or open a risk-free demo account to get started.
Average True Range
Average True Range (ATR) helps in identifying how much a currency pair price has fluctuated. This, in turn, helps traders confirm price levels at which they can enter or exit the market and place stop-loss orders according to the market volatility.
Moving Average Crossover
The Moving Average Crossover is a valuable tool to find the middle price-point of a trend in forex trading. When currency prices crossover their current moving averages, it helps traders identify the favorable buying or selling points for the currency.
What is the Bullish Engulfing Candlestick?
Bullish Engulfing Candlesticks helps in identifying an uptrend reversal in the market. This candlestick pattern stands out because a trader does not need to wait until the entire pattern is completed to enter a trade.
How To Trade The Gartley Pattern
The Gartley pattern helps identify price breakouts and signals where the currency pairs are headed. The pattern is also widely used in the forex market to determine strong support and resistance levels.
How to Trade Forex With NFP V-Shaped Reversal
A Non Farm Payroll (NFP) V-shaped reversal refers to a sudden increase or decrease in the currency pair prices right after an NFP report is released.
Candlestick Patterns: Top Candlestick Charts Every Trader Should Know
Candlestick patterns depict the price movement of assets in a graphical manner. Candlestick patterns also enable traders to predict market behaviour.
What is the Evening Star Candlestick Pattern?
Evening Star Candlestick Patterns help traders identify ideal exit levels in the forex market by signalling a slowed upward momentum and strengthened downward momentum.
How to Use Ichimoku Cloud in Forex?
The Ichimoku Cloud provides a clear market trend direction to the traders and helps them make market decisions accordingly.
Pennants Pattern: How to trade bearish and bullish pennants
Pennant Patterns work as a continuation signal in the forex market and help identify the ideal entry and exit price points
How to Trade Forex With Renko Charts
Renko Chart is a technical indicator that provides strong market trend directions by filtering out minor price movements
What are Ascending and Descending Triangle Patterns?
The Ascending and Descending Triangle Patterns confirm continued trends in the forex market.
How to Identify Cup and Handle Pattern in Forex Trading
The Cup and Handle Pattern is a technical price chart that forms the shape of a Cup and a Handle, which indicates a bullish reversal signal.
What is the Head and Shoulders pattern?
The Head and Shoulders pattern is a trend reversal indicator that predicts bullish to bearish and bearish to bullish reversals in the forex market.
What is the Hammer Candlestick Pattern?
Hammer Candlesticks enable traders to identify potential market reversal points, determine the ideal time to enter the market and place buy or sell orders accordingly.
What is The Opening Range Breakout Strategy
The Opening Range Breakout (ORB) Strategy involves taking forex positions when the currency pair prices break below or above the previous day's high or low
Morning Star Indicator
The Morning Star Indicator helps identify strong trend reversals in the forex market and enables you to take trade position entry decisions accordingly.
Stochastic Indicator is used in Forex to identify overbought and oversold market conditions that substantially lead to market reversals.
Favourite Fib Fibonacci Retracement
Fibonacci retracement strategies help traders identify the market's support and resistance levels, trend reversal points, and entry and exit decisions.
Heikin Ashi Candlestick Pattern
The Heikin Ashi Candlestick pattern is almost the same as the traditional candlesticks, with one big difference—the former is an averaged out version of the latter.
Multiple Time Frame Analysis in Forex
By monitoring different currency pairs in different time frames, you can make your Forex trades more successful and profitable.
Andrew's Pitchfork Trading Strategy
Andrew's Pitchfork is a Forex trading strategy that can predict protracted market swings and help you in identifying potential market trends that can indicate potential exit and entry points.
Fibonacci retracements are one of the most popular methods for predicting currency prices in the Forex market. Predicting upward or downward market movement can help traders with accurate price analysis for exiting or entering the market.
Trading in Volatile Markets
Forex volatility is the measure of how frequently a currency's value changes. A currency either has high volatility or low volatility depending on how much its value deviates from its average value.
The ABCD pattern
One of the most classic chart patterns, the Forex ABCD pattern represents the perfect harmony between price and time.
The Bearish Gartley Pattern
The Bearish Gartley pattern was introduced in 1935, by H.M. Gartley in his book, “Profits in the Stock Market”. The pattern helps Forex traders in identifying higher probabilities of selling opportunities.
The Bullish 3 Drive pattern
The Bullish Three Drive pattern in Forex trading is a rare pattern that gives traders information about the Forex market's potential at its most Bearish point, and in turn, suggests probabilities for a market reversal.
What is the MACD Indicator?
The Moving Average Convergence Divergence (MACD) indicator helps traders quickly identify short-term trend directions and reversals in the forex markets. You can use the MACD indicator to determine a currency pair price trend's severity and measure its price's momentum and even identify the bearish and bullish movements in the currency pair prices.
Guide to Forex
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