Bollinger Bands explained refers to advanced trading methods in trading. In it, traders combine BB with many other indicators to obtain more optimal trading signals. Let’s Forex Trading learn in detail about how to use Bollinger Bands in combination with advanced indicators below!
Learn in detail about Bollinger Bands explained
Bollinger Bands explained is widely used in the trading community. This is one of the most popular indicators in traders’ trading strategies. In UK, Bollinger Bands are also often applied in options trading in the foreign exchange market.
Overview of what you need to know about the Bollinger Bands indicator
Bollinger Bands explained is a technical analysis tool developed by John Bollinger in the 1980s. It is one of the most popular indicator tools in technical analysis. It is used to measure price fluctuations and determine potential price ranges of financial assets. Including stocks, forex and now cryptocurrencies.
The structure of Bollinger Bands includes three simple lines: Simple Moving Average (SMA), upper band (Upper Band) and lower line (Lower Band). SMA represents the average price of an asset over the last few sessions. While the upper and lower lines represent two standard deviations of the closing price from the moving average.
This indicator is intended to provide important information about price fluctuations. To help investors identify potential buying and selling points. At the same time, it helps them better understand asset price trends. Bollinger Bands have become one of the extremely important and popular tools widely used in the investment and trading community. This helps increase efficiency in making trading decisions.
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What are the important indicators that go along with Bollinger Bands?
In the process of researching and exploring Bollinger Bands explained, I came across other indicators that are rarely mentioned by UK traders or authors in their literature. In particular, John Bollinger uses these indicators along with Bollinger Bands.
These two indicators can be extracted directly from what is Bollinger Band. Below are two popular indicators that come with Bollinger as follows: %b and BandWidth:
- First, %b provides information about the relationship between price and Bollinger Bands. It is an important factor in developing trading systems based on price action.
- Second, BandWidth measures the width of Bollinger Bands. Bandwidth is an important factor in detecting Squeeze areas – cumulative Band areas. Bandwidth can play an important role in detecting areas where price traps or breakouts are likely to occur.
Analyze the detailed structure of Bollinger Bands and calculation formula
Bollinger Bands, is a tool to measure price movements. To help identify trends and help traders find entry points. It is formed from three main components as follows:
- Simple Moving Average (SMA): This is an average of the asset’s closing price over a set number of sessions. Typically, this SMA moving average is calculated by taking the total closing price of the asset over a number of sessions and dividing it by the total number of sessions.
- Upper Bollinger Band: This line is a diagonal pull-up from the simple moving average. Usually twice the standard deviation of the closing price from the moving average. The upper line will represent a potentially high price range.
- Lower Bollinger Band: This is also a diagonal pull down from the simple moving average. Usually twice the standard deviation of the closing price from the moving average. The lower line will represent an area with a low potential price.
Formula to calculate Bollinger Bands
In the default cycle of Bollinger Bands explained it is usually 20 days. The specific formula is as follows:
- Middle Band = 20-day moving average (SMA20).
- Upper Band = Middle Band + (20-day standard deviation of price x 2).
- Lower Band = Middle Band – (20-day standard deviation of price x 2).
Specifically, the standard deviation values for the SMA50, SMA20, and SMA10 lines are usually 2.1, 2.0, and 1.9, respectively, as recommended by founder John Bollinger.
In-depth trading Method with Bollinger Bands
Here are some effective trading strategies with in-depth Bollinger Bands:
Bollinger Bands Squeeze bottleneck strategy
Bollinger Band Squeeze trading strategy, also known as Bollinger’s “bottleneck”. It focuses on evaluating the signals from the narrowing of the Upper Band and Lower Band lines in the BB band. When these two lines are close together, creating a “knot”, the market often tends to accumulate. This often predicts a strong upheaval to come. Here’s how investors can use this strategy:
- Open a buy order: Investors can open a buy order when the price breaks through the bottleneck. It crossed the Upper Band line and continued to rise.
- Open a sell order: Conversely, investors can open a sell order when the price breaks through the bottleneck. Crosses the Lower Band line and continues to decline.
Specifically, the order placement process can be performed as follows:
- Entry point: The investor opens an order based on the closing price of the candle that breaks the knot.
- Stop loss: For buy orders, the stop loss is placed below the knot and near the most important support point. Conversely, with a sell order, the stop loss is placed above the resistance area.
- Take profit point: This can be based on the expected R: R ratio or take profit when the price approaches the Upper Band line for buy orders and the Lower Band line for sell orders.
Technical analysis with Bollinger Bounce strategy
Every time the price touches the Upper Band and Lower Band lines of the Bollinger Bands, investors usually open a trading order. Here, Bollinger’s Upper and Lower lines are often seen as resistance and support levels. Specifically:
- Open a buy order: Investors often open a new buy order when the price touches the Lower Band line from below and tends to go up.
- Open a sell order: On the contrary, investors often open a sell order when the price touches the Upper Band line from above and tends to go down.
The order placement process is usually carried out as follows:
- Entry point: Investors observe signals from candlesticks appearing at price areas touching the Bollinger Bands.
- Stop loss: With sell orders, the stop loss is usually placed right above the Upper Band line. Conversely, with buy orders, the stop loss is usually placed just below the Lower Band line.
- Profit-taking point: Traders often decide to take profit based on the previously expected R: R ratio.
Combine Bollinger Bands in depth with other indicators
Combining Bollinger Bands explained with other indicators can help traders better understand the market situation. From there, you can make better trading decisions.
Combine the Bollinger Bands indicator with some popular reversal patterns
As seen in the previous strategies, the mere use of Bollinger Bands explained is enough to make many profitable trades. However, to make the most of this indicator’s signals, investors can combine it with other reversal patterns.
Basically, when price movement starts to drift away, it usually comes back. It points towards the average line of Bollinger Bands. Therefore, we can combine Bollinger Bands with reversal patterns as follows:
- Evaluate current price support and resistance zones.
- Consider the shape of Bollinger Bands in those zones.
- Look for reversal patterns like Hammer, Bullish Engulfing, Bearish Engulfing, etc
- Based on information from models and BB bands, investors can easily determine the most suitable point to open a new order.
Tradingview Backtesting can also assist in determining the effectiveness of combining these models.
Combine Bollinger Bands effectively with the RSI indicator
RSI stands for Relative Strength Index. It is a tool to evaluate the strength or weakness of price movement trends. The most basic use of RSI is when the indicator crosses the 70 zone and falls. Then the investor will open a Sell position. Conversely, when the RSI surpasses 30 and goes up, investors will open a Buy position.
When combined with Bollinger Bands, traders can also take advantage of using RSI as above. Specifically, based on RSI divergence, traders can recognize reversals. In there:
- Bearish divergence: This will often be a sign of a top being created while the RSI continues to decline.
- Bullish divergence: This will often be a sign of a bottom while the RSI continues to rise.
Based on these signs, traders can consider the following factors before deciding to open a position:
- With Bollinger Bands, as the price fluctuates further, it tends to return to the Middle Band line. At that time, the Bollinger bands are considered a dynamic resistance area.
- With RSI, when bearish divergence begins to appear, the market is likely to create a new peak. However, the RSI index still decreased until it formed a new peak.
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Combining advanced Bollinger Bands and Ichimoku
Ichimoku, also known as Cloud Indicator. This is a technical tool used primarily to identify support and resistance levels. At the same time, identify price trends, measure momentum, and provide trading signals for Forex.
To effectively use Bollinger Bands and Ichimoku, traders need to have complete experience and knowledge. While it can yield worthwhile results, mastering this strategy requires sacrifice and practice over many previous trades.
Here are some notes for traders when applying Bollinger Bands this way:
- First note: Traders need to confirm that the price has broken the Upper Band line. At least after the previous tightening.
- Second note: Traders need to observe the two edges of the Bollinger Band shrinking above the cloud (i.e. the convergence of the two edges and the price reversing). The contraction of both the Upper and Lower Bollinger Bands above the Ichimoku cloud is an important factor.
After confirming the above, the trader can open a short position when the price touches the Lower line of Bollinger Bands explained.
Combine the Bollinger Bands indicator with the MACD line
Bollinger Bands explained helps investors better understand the natural cycle of price fluctuations. While MACD provides effective trend-following momentum signals. Combining both indicators simultaneously ensures the certainty of trading decisions.
Often, investors will use Bollinger Bands and MACD together to analyze prices during periods of acceleration or deceleration. This helps predict the impending breakout.
Specifically, the trading strategy combining Bollinger Band and MACD is implemented as follows:
- For buy orders: Investors enter buy orders when the market price touches the Lower Band line of Bollinger Bands. After that, the price continues to move towards the Middle Band line. At the same time, the two moving averages of MACD crossed from bottom to top. If the Histogram changes from red to green, the buy signal becomes more reliable.
- For sell orders: Investors enter sell orders when the price touches the Upper Band line and continues to decrease through the Middle Band line of Bollinger Bands. At the same time, both MACD moving averages crossed from above.
Conclude
Above is some detailed information about the trading strategy used by Bollinger Bands explained. Overall, BB has proven to be an accurate tool that every Trader can apply. However, combining it with other tools such as candlestick reversal patterns or RSI can improve the success rate of the trading strategy. Forex Trading hopes that you will take advantage of these suggestions and achieve success!
Frequently asked questions
What is Bollinger Bands Squeeze and how to use it in trading?
Bollinger Band Squeeze occurs when the Upper Band and Lower Band lines come close to each other. To show reduced volatility. Traders can use this to prepare for breakout trading opportunities.
How do you combine Bollinger Bands with other indicators like RSI or MACD?
Traders can combine Bollinger Bands with RSI or MACD. Aim to determine entry and exit points into the market based on the buy and sell signals of both indicators.
Are there any notes to remember when using Bollinger Bands explained in trading?
Although Bollinger Bands can provide powerful buy and sell signals, however, traders need to combine them with risk management methods. Determine the general trend of the market before making trading decisions.
