The Bollinger Bands Strategy Guide for Forex Trading

Using this tool correctly can help investors and traders make better decisions and hopefully earn profits. But Forex prices can be highly trending, and the central tendency suspended for long periods. Moreover, one of the good features of Bollinger bands, that they are adaptive to changing conditions, is also a drawback. You are not getting any perspective on recent moves, such as the recent highest high and lowest low, or the momentum of the current move. Often used together with Bollinger bands are the MACD, a momentum indicator, and the parabolic SAR, which has a strong momentum component. They are simply one indicator designed to provide traders with information regarding price volatility.

  • Let’s compare the indications of moving averages using an example.
  • After each entry, it can be seen that the candles are ‘walking the Bollinger‘ .
  • From my own experience, I can say that it makes no sense to use the Bollinger indicator with a period of less than 10 and more than 50.
  • The price is mostly held within the Upper band SMA and Lower band SMA .
  • Therefore, we can talk about a signal for the upcoming bounce.

The values range between 0 to 100, and the RSI calculates the number of days when it is closed down and closed up, giving approximate values of overbought and oversold territories. This price chart lays out the investment objectives with the possible outcomes making it easy to follow the forex trade. The same trading strategy is applied for trading any asset.

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Familiarity with the wide variety of forex trading strategies may help traders adapt and improve their success rates in ever-changing market conditions. Bollinger Bands® are not recommended as an exclusive method for understanding price movements. Functionally, Bollinger Bands work best in combination with other indicators, such as the moving average. The two trading bands are placed two standard deviations above and below the moving average . Using two standard deviations estimates that 95% of price data will be contained within the two bands. For generally steady ranges of a security, such as many currency pairs, Bollinger Bands act as relatively clear signals for buying and selling.

The second push creates a new high and touches the upper level. This example clearly shows that in practice the head and shoulders are rarely formed as a perfect structure. Deviation of one or more hotforex broker review parameters is considered acceptable. For beginners, I recommend starting with stop losses set off from local lows. Equality of the lows on the left and right sides indicates a calm market.

At 50 periods, two and a half standard deviations are a good selection, whilst at 10 periods; one and a half perform the job quite well. Bollinger Bands consist of three lines, the middle of which is a Simple Moving Average with the default value of 20. The upper and lower band are found two standard deviations either side of the SMA. Investments involve risks and are not suitable for all investors.

bollinger bands in forex

EMA or FEMA calculation is fastest, advice experimenting with channel lenght… Here is little updated indicator with MTF, alerts, arrows, button and choosable price. However, these signals are no guarantee of a move, so caution is advised. Bollinger prtrend on Bollinger Bands is the only book by the author of the instrument that describes Bollinger trading in detail. The Moving Average in Bollinger Bands is not a substitute for strategies that involve SMA, EMA and other types of averages.

If you could find the time to add a smoothing option to the G-Channel indicator i woud be most appreciative, the lag is fine with me. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. An RSI above 80 indicates that the market is overbought, which could be a chance to sell it.

In addition to the classic setting of Bollinger Bands, combined options are possible as well. For example, a chart might contain two band indicators plotted using the same calculation period but with different ratios. In his book, the analyst gives an example of a chart with two bands in 20 periods that differ in width by 1 and 2 standard deviations.

Limitations of Bollinger Bands®

In other words, if it is USD/JPY, the US dollar is sold according to its Japanese currency equivalent, the Euro is sold according to its worth in US dollars. This allows a trader to make transactions by buying and selling different currencies at a beneficial price point, making a financial gain. When three strong bearish candlesticks then descend down to the lower band, one would have awakened like Goldilocks to the potential southern break. The fourth candlestick that penetrates the lower band becomes a long-legged Doji, it would have given pause as to the determination of the bears. However, one would be given confidence by the visual cue that the upper band was hooking up at the same time that the lower band was hooking down.

This means that there is a high probability that the price will go up for some time. For trend trading, Ketty recommends opening long positions when the close of the candlestick hits the upper quarter of the double Bollinger indicator. In this case, the two bars preceding it should close in the neutral half. Keep a long position as long as the candles close within it. Bollinger noticed that most trends are born when BandWidth is at its lowest. Like the calm before bad weather, market volatility is very low.

In this example, the upper band will be used as the take profit level. Bollinger Bands are a type of technical analysis used to lay out trend lines two standard deviations away from the simple moving average price of a financial instrument. Bollinger Bands are one of the most popular technical indicators in any financial market, including Forex.

The DBB Neutral Zone

Here line K crosses D, and the Stochastic itself shows oversold below the 20% level. The price will consolidate in the neutral zone – there will be a “calm before the storm”. The third spike is also not much stronger than the previous ones.

bollinger bands in forex

In the process of their formation, there is a reversal of the price movement, which opens up opportunities for effective entry into the market. Even more useful is the analysis of the interaction of the head and shoulders with the BB. It allows you to recognize the pattern before it is fully formed, which means opening a position at one of the high points and increasing the final profit from the trade. As for the choice of the optimal moving average period, the classic version of the Bollinger indicator uses a 20-period MA. This range is approximately equal to the number of trading days in a month. If for some reason the period has to be shortened, in order to obtain the optimal width of the band, you need to cut the number of standard deviations.

Benefits and Risks

W6, W7, W9, W11, W13, W15, M2, M4, M6, M8, M10, M11 are reversal formations. The number of values ​​corresponds to the calculated period. If 10 cells are filled in, the calculation will correspond to a moving average with a period of 10.

In this case, it will be a signal either about an overbought asset, or about a change from a bearish to a bullish trend. If you look closely at this formula, you will understand that if the last price is located on the upper band, the calculation result will be 1. If it is located on the moving average, the %b value will be 0.5. And if the price stops at the lower band, the result of the above formula will be 0.

This tool can also be used to experiment with inputs to calculate the MA or the multiplier. The author of the indicator looked for an effective way to select the interval for a long time. The very first mention of a tool similar to Bollinger Bands dates back to 1960. If the candles start to break out below the BOTTOM band, then the price will usually continue to go DOWN.

If the first point crossed the band, and the second is formed within the channel, then the second low will be considered higher even if it is located lower in absolute terms. The EURUSD chart shows Bollinger Bands at the time of the trend development. The green rectangle marks the area when the lower line begins to move down during the formation of an upward trend. After that, in the area marked with a blue rectangle, the lower band reverses and begins to move up. And indeed, after a while there is a transition from a bullish trend to a bearish one. In order to read these signals correctly, you need to use additional indicators as filters.

Set stop losses and take profits similarly as with long positions. Enter when one of the following candles closes within the channel. The price will move to one of the trading quarters – usually this happens when a trend reverses. This method westernfx review appeared as a result of the efforts of the exchange analyst Kathy Lien. How to Make Big Profits in the World of Forex, she described an unusual technique involving the use of two Bollinger Bands of the same type in the same chart.

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Finally, you can have a series of 40 periods or more of a uni-directional move. First, a trader must understand how Bollinger Bands are set up. There is an upper and lower band, each set at a distance of two standard deviations from the security’s 21-period simple moving average. Therefore, the Bands show the volatility of the price in relation to the average, and traders can expect movements in price anywhere between the two bands. Forex traders can use the bands to place sell orders at the upper band limit and buy orders at the lower band limit.

Investors make purchases after a repeat testing without much stress and soon get the expected profit. W-bottom is the most common pattern of transition to the bullish market. It is rarely seen in its pure form and often has a variety of deviations from the ideal shape. For the rest of the figures – M7, M9, M12, M14, W1, W3, W5, W8, W10 – signals are generated based on the general rules described below for W and M shapes. W6, W7, W9, W11, W13, W15 are most often part of the head and shoulders reversal formation.

Another way to see the upper band is as the level at which the currency will be considered overbought, and the lower band as the level where it would be oversold. We do not buy this interpretation or rather this use of the terms overbought and oversold. Another reason is that the 20-period moving average is a lagging indicator and is limited to 20 periods. Big events could have been developing 22 periods back but they would not show up on the current band. Bollinger bands are adaptive by their very nature and offer no anchor or historical perspective.

You see a narrow band widening out to a wide band on a spike high followed by a spike low, but you would be hard-pressed to say there is any directional trend on this chart. To execute, one sells from the upper Bollinger Band and buys from the lower Bollinger Band. The profit target is typically the midpoint and stop loss locations fall above or below the upper and lower band. Bollinger Bands are useful for demonstrating changes in volatility of a financial instrument. AximDaily is considered a marketing publication and does not constitute investment advice or research.

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