bollinger bands indicator is a reliable technical analysis tool, helping investors identify buy/sell points and manage positions effectively. This tool relies on price movements to provide a comprehensive view of the market situation. To better understand Bollinger Bands and how to apply them in forex market trading, please follow the following article with Forex Trading.
General overview of Bollinger Bands indicator
In the field of forex investment, Bollinger Bands (BB) is considered a popular and indispensable indicator in the technical analysis method favored by many investors.
bollinger bands indicator?
Bollinger Bands is a tool that combines trend and price fluctuations. To create a reliable indicator, helping investors understand high and low price areas. Specifically, when the price is within the upper Bollinger Bands, it is considered high. On the contrary, when it is in the lower band, it is considered low. This helps investors easily predict price trends and determine appropriate trading points.
bollinger bands indicator was invented by John Bollinger in the early 1980s. The book “Bollinger on Bollinger Bands” written by him is a valuable document. It instructs how to use Bollinger Bands. This is to help investors better understand this tool.
Bollinger Bands is a simple but effective tool that attracts the attention of many investors. However, many investors still do not really understand how to use Bollinger Bands and often apply it opportunistically.
Bollinger Bands parameters and calculation
The parameters of the Bollinger bands indicator include three main components:
- Upper Band: Calculated by adding the 20-day moving average (SMA) price with twice the standard deviation.
- Middle Band: This is the 20-day SMA.
- Lower Band: Calculated by subtracting twice the standard deviation from the 20-day SMA price.
Standard deviation, a statistical quantity, measures the dispersion of a data set by measuring the difference between the values and the mean.
Formula to calculate Bollinger Bands index:
- Upper Band = SMA 20 + 2 x 20-day Standard Deviation
- Middle band = Average value of closing price (SMA 20)
- Lower Band = SMA20 – 2 x Intraday 20 Standard Deviation
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Application Bollinger bands indicator in trading
In forex trading, the Bollinger bands indicator is applied in technical analysis as follows:
Use Bollinger Bands to evaluate price fluctuations and market stability
Bollinger Bands are a tool to determine price movements and market volatility. As the Bollinger bands widen, it shows an increase in the standard deviation. It represents an increase in price volatility and market volatility.
Conversely, when Bollinger Bands narrow, it shows a decrease in standard deviation. This signifies a decrease in price volatility and the market becomes more stable.
Evaluate market trends and direction using Bollinger Bands
Bollinger Bands can also be used to evaluate market trends and direction. When the price moves in a narrow band between the two Bollinger Bands, this indicates that the price trend is stabilizing or the market is in an accumulation phase.
Conversely, when the price breaks through the upper or lower line, This could indicate a price explosion or a market trend reversal.
Trading signals based on Bollinger Bands
Bollinger Bands provide quite a few very useful trading signals. An important sign is the “Squeeze” (Bollinger band compression). When Bollinger band strategy narrow significantly, it indicates that the market is in an accumulation phase and a sign of an impending upheaval. This sign is often accompanied by a strong price boom afterward.
A buy signal appears when the price hits the bottom of the lower line. A sell signal appears when the price hits the top of the upper line. To increase the accuracy and effectiveness of trading decisions, traders need to combine these Bollinger Bands with other technical tools and indicators.
How to effectively use Bollinger Bands
In the forex field, building a trading strategy is extremely important and indispensable. Below, we will share with investors strategies to effectively utilize Bollinger Bands in technical analysis.
Effective trading strategy with Bollinger Bands Squeeze
The characteristic feature of Bollinger Bands is that the two upper and lower bands almost cover the entire price chart. To facilitate the “Bottleneck” or Bollinger Band Squeeze trading method. This is a classic method when using this indicator.
The market is always fluctuating through strong or mild fluctuations. When it oscillates in a small amplitude over an extended period of time. This is a sign of strong fluctuations to come. When a “bottleneck” area appears, this confirms to investors that the market is preparing for a boom. This is the ideal time to trade.
When this signal appears, the strategy is to wait for a sign of a break out of the narrow accumulation area as the price moves during volatility at the “bottleneck” area.
- If the price breaks out of the accumulation area in an upward direction, the investor executes a buy order.
- If the price breaks out of the accumulation area in a downward direction, the investor executes a sell order.
Buy low sell high strategy
In order to provide a relative definition of high and low prices for traders, the “Buy low sell high with Bollinger Band” strategy is formed through the use of Bollinger Band lines. This strategy is based on considering the upper and lower bands of the Bollinger Band. Like support and resistance levels. Therefore, investors execute sell orders when the price touches the upper band. Execute a buy order when the price touches the lower band of the Bollinger Band.
Although simple in theory, this strategy is relatively effective in sideways markets. However, when the market fluctuates strongly in an upward or downward direction, this strategy may encounter risks.
Therefore, the advice for new investors is to use this strategy only to better understand Bollinger Bands and the basic usage of this indicator. To apply in trading, investors need to have signal filtering skills. Respond to market fluctuations intelligently.
Combine Bollinger Bands with some reversal patterns
Investors can increase efficiency by combining Bollinger Bands with a number of reversal patterns. This method is based on the assumption that the price usually tends to return to the 20 SMA (middle band) after each fluctuation.
How to do this includes:
- Look at the support-resistance zones on the chart.
- Evaluate the morphology of Bollinger Bands in these areas.
- Look for some more reversal patterns. For example, Bullish Engulfing, Hammer, Bearish Engulfing,…
Based on the above information, investors can determine the appropriate entry point.
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Trendline trading strategy
After determining the breakout zones according to the Bottleneck method. In order to predict price trends, investors need to combine it with another strategy.
As mentioned before, the 20 SMA is the middle band of the Bollinger Bands. It represents the average closing price of the asset over the last 20 sessions. Therefore, when the market is trending strongly, if the price breaks out of the Bollinger Bands and then returns near the middle band. That makes it likely that the price will continue to trend.
The middle band acts as a dynamic barrier (support and resistance) for the market price. When the market shows signs of pullback near SMA 20, investors have the opportunity to place trading orders at this point.
Apply Bollinger bands indicator in depth
There are two popular strategies using Bollinger Bands that professional investors often favor.
Strategy 1: Break Bollinger Band
- This is a relatively simple strategy for the long-term market. When the candle’s closing price goes beyond the Bollinger band, we call it a breakout.
- To minimize risk, investors often combine support and resistance levels with other technical indicators.
- When the price breaks resistance, it is a buy signal.
- When price breaks support, it is a sell signal.
Strategy 2: Trade Volatility
- But when the price fluctuates small with the expectation of an increase: When the price fluctuates small and the Bollinger Band shrinks, this is a sign of rest before strong fluctuations return. Buying during this time is considered buying on volatility.
- Sell when the price swings large with bearish expectations: When the price is too high or low, the gap between the upper and lower bands widens. This is often accompanied by the need for the market to correct and reduce volatility. This is the ideal time to sell.
In addition, traders need to learn more about the what is backtesting program to be able to optimize their transactions.
Conclude
Through the above article, Forex Trading has introduced some basic knowledge about Bollinger bands indicator. At the same time, instructions were also given on how to use it effectively in the forex market. However, it should be remembered that Bollinger Bands are just a tool created by humans and have their own limitations. To apply it correctly and more effectively in long-term investment activities, we need to continue to research and understand it more deeply.
Frequently asked questions
What is the main function of Bollinger Bands?
Bollinger Bands are often used to identify support and resistance levels. Or measure market volatility, and evaluate whether the stock price is near the top or bottom of a price cycle.
How to read Bollinger Bands?
When the stock price touches the upper band of the Bollinger Band, you can consider selling. Because the price may be too high. Conversely, when the price touches the lower band, you can consider buying because the price may be too low.
What disadvantages do Bollinger Bands have?
Although the Bollinger Band indicator is a popular and useful tool, However, it also has some disadvantages that need to be considered. For example, in potentially volatile markets, prices can move out of the Bollinger Bands without meaning that a new trend has been identified.
