One of the commonly sought Indicators for technical trading and also one of the easiest to use is the Indicator “Bollinger bands”. The indicator is applicable to not only stocks and commodities but can also be applied to forex markets with an equal ease. A range-trader will know at the first look of this indicator that it calls for range-trading within the bands in the direction of the suggested trend and that can mean easy profits. Let’s explore the Bollinger bands strategy Forex in greater details in this article.
The application of this indicator produces two bands, one above and second below to the moving average line. There is also a centre line which is the average of the two bands and runs along with the market price line. It is believed that the price reading near to upper and the lower bands reflect overbought and oversold positions; hence the Bollinger bands strategy Forex calls for taking a position in the direction of the trend at the sight of an overpriced market i.e. the pair trading at near to the bands. The trader always believes that the price will fall back to the centre line which as we learnt is only the average of the upper and lower bands.
Of course, it’s advisable to move with the trend for effective trading which calls for identifying the trend for Bollinger bands strategy Forex and that is very easy to devise. The active users of Bollinger bands look for two simultaneous breakouts of the bands in any direction and that is believed to be the sign of a starting trend. That means if the Price breaks above the upper band, it will suggest a strong uptrend and of course visa versa. The indicator changes the color of the price bars as soon as a trend is identified. All that you need to do after this is that you decide on one of the three Bollinger bands strategy Forex i.e. trend continuation, range trading or breakouts pullbacks and then wait for your trading opportunity to come.
Bollinger bands strategy Forex also calls for setting your stop-losses outside the bands should you prefer range-trading and also calls for a rather shorter profit target which the best is taken at the centre line, i.e. the average line. Risky trader can also look for setting a TP order at the opposite band but then that’s individual preference and personal choice. Personally talking, trading in any form calls for an exit at the first possible opportunity and the same should be the case even while using this form of an indicator.
Coming to the convenience and comfort of this indicator, each of the Bollinger bands strategy Forex is as effective on the smaller time-frame as it is on the higher ones. That means should you prefer a rather investment style of trading for longer durations and larger profits, you can simple switch over to a higher time-frame like one-hour charts and then apply Bollinger bands indicator to find the pairs that have the maximum width between the two bands. Higher is the width, larger is the trade potential, and of course you can just trade with the same size stop-loss i.e. just ten simple pips. Day-traders can look for using this easy indicator on a simple one or two-minute charts, that itself should suffice to give them a good number of trades with a decent trade-size, all ending the same day. Bollinger bands strategy Forex is at its best while range-trading and if you could focus on just that, you will not need to look to any other form of an indicator, a book, a teacher or a signal-seller.
Read below for pictorial explanation:
a) One minute chart with simple moving price line before application of Bollinger bands
a) Same chart with Bollinger Bands
Upper Red line- Upper Bollinger Band
Lower red line- Lower Bollinger Band
width between upper and lower bands- Volatility
Centre yellow line: The moving average line