Bollinger Bands in Forex Trading
Bollinger Bands Forex indicator (eng. Bollinger Bands, BB or “bolik”) is a combination of three SMA (simple flexible average): the upper and lower form a trading channel and limit the price movement, the third (average, also SMA) is located between the first two in an equal distance from them.
In practice, it is noted that the price diagram of any tool is within the channel of the upper and lower bands for 95% of trading time. Customary, bands have the settings per default:
- SMA (20) – average band;
- SMA (20) minus 2 standard deviations – lower;
- SMA (20) plus standard deviations – upper.
The standard deviation is calculated statistically and shows the indentation from the average parameter. Standard parameters can be changed, but it should be noted that with SMA parameter less than 10, flexible average lose their effectiveness. In real trading the author on his own, John Bollinger, recommends the next settings for average band: SMA (12) – for small time frames, SMA(20) – for medium-term and SMA(50) – for long periods. The value of the standard deviation can also be selected in practice.
Bollinger Bands work both on the price diagram and in the indicator window. Limits (bands) are strong dynamic price levels. On unstable traffic the bands expand, increasing the trading space, when the market quieten down – shrink.
How Bollinger bands help in trading
Learning the Bollinger Bands, it is worth to pay attention to the following: the signals of this indicator are highly dependent on the current market volatility. If the bands diverge in tote, then this is evidence of the continuation of the existing price tendency, if the external bands shrink then this trend fades and it is worth waiting for a reversal.
The longer the market is traded in a flat in the narrow channel “Polos”, the stronger the exit will be from it.
When after the “sawtoothlike” price movement outside one of the bands the same movement inside the bands offers, then trend reversal is extend.
The prices’ movement which starts from one of the bands often reaches the opposite.
In practice, after breaking through the band no more than 4 candles in a row, the correction of trend begins.
Signals for opening of a deal
We open the purchase under the following conditions:
- we catch the moment when the pair concentrates at the lower bands’ border;
- we wait when the price breaks the average band (from the bottom up) and the next candle will start to form above average band, if at the same time the external bands diverge – open up;
- usually close in the moment of candle touching of the top band, but if the lower and upper bands continue to upward movement, then continue to hold the position.
The general direction of the current trend is simply specified: when the price diagram moves in the range from the middle to the upper band – ascending (bullish), if the price moves in the range from the middle to the lower band – downward (bearish).
When the bands form a very tight channel, this means: firstly, low volatility, secondly, it gives very strong signal for a sudden direction change. It is often used by scalpers, exposing a bunch of pending orders beyond the channel’s bands – just above the top and just below the bottom.
To understand whether a price reversal is taking place, keep watch attentively, how the price after the first breakdown acts.
Do not forget that Billinger Bands keep away the accurate signals, that is why as a confirmation it is important to use oscillator indicators as, for example, RSI, ADX or MACD. With proper use this kit gives a stable profit.