Bollinger Bands were produced by John Bollinger within the 80’s and it is without doubt probably the most popular indications for golf swing trading within forex. Bollinger Rings measure price deviation from the central stage – the actual moving average.
The idea behind the actual Bollinger Band indicator is that after price deviates in the mean (the moving average), price can be viewed as either oversold or even overbought. Whenever measuring oversold or even overbought, traders may generally locate a trading chance.
Oversold: Look with regard to reversal deals or this is often the first a part of a set up for an additional short trade in the moving average. Oversold is really a bearish situation.
Overbought: Look with regard to reversal deals short or this is often the first a part of a set up for an additional long trade. Overbought is really a bullish situation.
There is actually something unique about Bollinger Rings that adds just a little twist in order to deviations: the indicator adds inside a volatility calculate.
Why is a measure of volatility important?
Top of the and reduce bands from the Bollinger Rings will agreement and expand based on price motion.
The bigger moves within price may expand the actual bands that will require a bigger moves associated with price to achieve the top or reduce band (deviate in the average price) to higher reflect the actual volatility from the market you’re trading.
Keep in mind, we require volatility within price to create money. In the event that markets, regardless of whether Forex, Shares or what ever, or not really moving, you don’t earn money.
When marketplaces over overextended in the average price (deviating in the center type of the bands) we are able to expect the marketplace to imply revert. Mean reversion is really a time examined mechanic associated with price movement that occurs in each and every market.
BOLLINGER BAND CALCULATION
Here’s how the bollinger band is calculated:
- The Middle Bollinger Band is simple a 20-period Simple Moving Average = Average of Last 20 Closing Prices
- The Upper Bollinger Band is calculated by adding 2 standard deviations to the Middle band = Middle Band + 2 x SD
- The Lower Bollinger Band is calculated by subtracting 2 standard deviations from the Middle band = Middle Band – 2 x SD
- standard deviation is a statistical indicator that measures the average deviation of each number in a sample from the average number.
- the higher the number, the more scattered the sample which means the higher the volatility of the currency pair.
So from knowing how the bollinger band is calculated, you can say that the more distant the upper and lower bollinger bands are from each other, the higher the volatility of the market.
The chart below shows and example of this:
TRADING BOLLINGER BANDS
These are the 4 best ways on how to to trade with Bollinger bands.
Method One: Trading The Dynamic Support And Resistance Of Bollinger Band Lines
You will notice that the upper and lower bands can be used as resistance and support levels respectively. So when you see a price hit the upper and lower bands and a reversal happens, it can lead to some big moves and you can use that as your trade signals.
Note: with the sort of trading system previously mentioned, its far better trade in the trending market because the signals may well be more reliable. Ranging and also non tending markets will provide you with problems using this.
For illustration, if industry is trending straight down, you need to only try to find sell trade if the price hits the top of bollinger band line and perchance confirm the entry using a bearish letting go candlestick pattern.
The contrary is furthermore true…if industry is trending upwards, then only try to find buy signs when price hits the reduced Bollinger band series.
I want to point out the the particular outer groups don’t in fact support or perhaps resist price movements. It can be a general zoom where price provides extended definately not the suggest (average price) and we could expect a bad move inside price.
Method Two: Trading the Fixed Horizontal Resistance And Support Lines In Conjunction With Bollinger Band Lines
This method is fairly simple. What you are looking for is a horizontal support or resistance level which coincides with price touching the upper or lower bollinger band in this level.
It is also important to make sure that there has been price reversal at least once on this support or resistance level which will allow it to have significance thus making trading signals more reliable. See chart below for example:
Watch for price to break through the upper or lower bollinger band lines. Make sure the candlestick closes above the upper bollinger band line before you buy or close below the lower bollinger band line before you sell.
In a very strong trending market, this method works well but let’s be honest, in strong trends, a lot of things work well.
But having said that, the signals produced from trading bollinger band breakouts like this are less reliable.
Because usually by the time you enter a sell or a buy trade, the market will reverse and you will get stopped out.
However, there’s a last trading method below that allows you to take breakouts of bollinger band lines and the trades from this can give you very good profits…its called the bollinger band squeeze.
Method 4: Trading The Bollinger Band Squeeze
Whenever you see price caught or “squeezed” between your upper as well as lower bollinger band outlines, it implies that the market is really a period associated with low volatility and it is a matter of your time before the breakout happens…either upward or downwards. This is really a prime chart location to consider breakout deals from consolidations within price.
The bollinger band indicator enables you to see this particular squeeze as well as capitalize about the breakout that occurs afterwards. To be honest, we know it’ll break away – all of us just don’t understand when.
You are able to place impending 2 impending stop purchases on each sides simply outside the actual squeeze that will trigger whenever a breakout occurs. Once 1 pending purchase is triggered, cancel another pending purchase.
Or you are able to place stop loss about the other size from the squeeze or even halfway point between your squeeze.
Another way to trade the bollinger band squeeze is allow the breakout to happen and then wait for price to reverse to touch the middle bollinger band line and enter an order when price starts to head back in the breakout direction again.
In the chart above, notice that a breakout did happen when a red candlestick closed below the bollinger band squeeze but the next candled was bullish and price went up to touch the middle bollinger band line then once it touched it, price reversed all the way down…a big downward move.
The best thing about trading chart breakouts is that trends start with breakouts. This is why swing trading is a popular form of Forex trading and other markets. You catch the beginning of a trend and you can make your year with one trade.
Bollinger Bands Need A Complete Trading Strategy
It is far too easy for traders just to slap this indicator on their chart and start trading. You must test how you will trade Bollinger Bands as part of an overall trading strategy:
- When will you exit?
- Where is your stop loss?
- What does your trade setup look like?
- How much will you risk per trade?
- What markets will you trade?
If you are Forex trading, remember that not every currency pair has enough volatility. You may see far too many Bollinger Band squeeze setups but no trigger. Stick to the major currency pairs and include the EURJPY, GBPJPY, and even the GBPCHF.