If you are a forex trader and your not using Bollinger Bands you should as they are one of the simplest and most useful tools you can use for bigger profits in your forex trading strategy. Here we will look at exactly what Bollinger Bands are 3 ways you can use them to increase your forex profits.
Bollinger Bands Defined
Developed by John Bollinger, Bollinger bands are one of the most popular, flexible and easy to use technical indicators around. Here we will look at the logic behind them and how to use the to enjoy greater forex profits.
Bollinger bands are simply, volatility bands one each side of a simple moving average.
Bollinger bands are calculated using the standard deviation of price over the same period as moving averages and plotted on either side of the moving average. Moving averages are used to identify the underlying trend and Bollinger bands combine this with the ability to see the volatility of the individual currency as a trading envelope.
The distance between upper and lower Bollinger bands reflects the standard deviation of price (volatility) of the currency traded.
As prices become more volatile the outer bands move further away from the longer-term average, as volatility decreases they are of course closer to the moving average.
Why There so Useful
In any market, the value of it tends to rise slowly overtime but price spikes occur from time to time and these are normally a reflection of the greed or fear of the participants.
Short term price spikes never last for long and prices eventually come back to more realistic levels ( in the case of the Bollinger band) this is the moving average. The volatility of the outer bands therefore tells us how volatile prices are – and how far away prices have moved from fair value.
Bollinger bands can be used in the following way
1. Catching New Trends
When a market is in consolidation it tends to exhibit low volatility, when it trends on the other hand higher volatility is normally present.
When Bollinger bands are narrow, this shows a market with low volatility however low volatility in currencies never lasts for long and traders can be on alert for a breakout and new trend.
Trader should look for prices to break out of the outer bands in either direction to indicate a potential new trend.
2. Timing Your Trading Signal
If you want to get in on an existing trend the Bollinger Band can help you determine the best area to execute your trading signal in terms of risk to reward.
In a strong trend prices will tend to dip to the centre band or fair value and this is the place to execute your trading signal.
Look at any strong trending currency and you will see how effective this simple strategy is.
3. Spotting Market Tops and Bottoms
When top of the band is hit, you can sell, prices should revert back to the moving average. If the price touches the bottom of the band, they look again for prices to revert back to the average.
DO NOT USE IN ISOLATION!
Bollinger bands are a volatility indicator – they should NOT be used in isolation to enter trading signals.
When using Bollinger bands they should be combined with support and resistance lines on your forex charts and ideally, before entering a position, you should use momentum oscillators, to confirm your move. An ideal one is the stochastic ( although there are many more), if you confirm each set up, you will get the odds on your side and that means big long term profits.
Bollinger Bands are a great tool and if you want to trade more profitably, make Bollinger bands part of your forex education.