In-depth Bollinger Bands is a technical analysis indicator developed by John Bollinger. This type of tool is known as an indicator for analyzing market trends or building effective investment strategies. So what specifically is Bollinger bands strategy? In the article below, Forex Trading will introduce to you detailed information about the Bollinger Bands indicator and how to use it for effective trading.
General introduction about Bollinger bands strategy
Bollinger bands strategy is a combination of market trends and price fluctuations. Immediately refer to the information below for details about Bollinger Bands.
What are Bollinger Bands?
Bollinger Bands is also known as Bollinger bands strategy. This type of technical analysis tool was invented by John Bollinger in the 1980s. This indicator is used to measure price fluctuations and identify potential trade points.
Structure of Bollinger bands strategy
The Bollinger Bands indicator is composed of 3 main parts, which are:
- The moving average (MA) Bollinger Bands indicator is surrounded by a moving average. This will usually be a 20-day simple moving average (SMA).
- The upper band is drawn at a distance from the moving average equal to the standard deviation multiplied by a coefficient (usually 2).
- The lower band is drawn at a distance from the moving average equal to the standard deviation multiplied by a similarity factor (usually 2).
Calculation formula Bollinger bands strategy
What is the formula for calculating Bollinger Bands? The answer is, the formula for calculating this indicator usually uses standardization for calculation. Because advanced Bollinger Bands are composed of 3 types of bands, the calculation formula is as follows:
- Upper band = 20-day SMA + (20-day price standard deviation x 2)
- Middle band = SMA20
- Lower band = SMA20 – (Standard deviation of price of 20 days x 2)
In there:
- Standard deviation is a tool used in statistics to find how different a sample is from the mean. The formula for calculating standard deviation is: σ = √ ((∑(χ – SMA)²) / N)
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What is the meaning of Bollinger Bands?
Bollinger bands strategy shrinks when the market is less volatile and expands when the market is highly volatile. This helps investors evaluate the risk level of the market and make appropriate investment decisions.
This type of band tightens as the distance between the upper band, lower band, and SMA narrows. Bollinger Bands will tighten prices so there is less volatility. At this time, investors can predict price fluctuations. On the contrary, with wider moving bands, the risk of price fluctuations is very high.
Furthermore, Bollinger Bands have a price breakout significance of about 90% of the action occurring in the upper and lower bands. When the price crosses these two bands, it is a big event. Similar to the meaning of tightening, a breakout is not a signal for price trading. Therefore, investors need to pay attention to avoid taking too many risks.
Analyze the advantages and limitations of Bollinger bands strategy
Like other types of indicators, advanced Bollinger Bands also have their advantages and limitations.
Outstanding advantages of in-depth Bollinger Bands
The outstanding advantage of this range is that it can be used to evaluate the risk of investments in market fluctuations. There are also:
- Bollinger Bands are built on basic mathematical concepts that are easy to understand and apply. Therefore, investors who are just starting to trade can use this indicator to analyze the market.
- Bollinger bands indicator can be used for many different asset classes, including stocks, bonds, forex and commodities. At the same time, this type can also be applied to different time frames, from short-term to long-term.
- This type of indicator can provide investors with a variety of useful information about the market. Includes volatility, trend and potential trading points. That’s why investors can make investment decisions without much risk.
- Bollinger Bands can help investors detect market trend reversal points early. This helps limit losses and take advantage of opportunities to make profits.
- Can be used Bollinger bands strategy to confirm trends identified by other technical analysis tools. For example, a stock price is trending up and at the same time touching the upper Bollinger Bands, which could confirm an uptrend.
Limitations of Bollinger Bands
- Bollinger Bands are not a stand-alone type of trading system. They are simply used to provide price fluctuation information to investors.
- Compared to other types of indicators, this line of indicators is recommended to be used with two or three other uncorrelated indicators to accurately know market signals.
- Bollinger Bands are calculated from SMA including old and new data so the information may be diluted. Additionally, the 20-day SMA and standard deviation times may not be effective in all situations. Therefore, investors need to adjust the SMA with the appropriate standard deviation to evaluate the market more accurately.
Instructions for using Bollinger bands strategy effectively
To be able to use Bollinger bands strategy effectively, you can refer to the following steps:
Make trades within the Bollinger Bands indicator price channel
Trading in the advanced Bollinger Bands price channel is a trading strategy based on the principle of buying when the price touches the lower band and selling when the price touches the upper band. This strategy is quite effective in taking advantage of short-term price fluctuations and profiting from market trends. Here’s how:
Step 1: Identify price channels
Insert Bollinger Bands into the price chart of the asset you want to trade. The price channel is formed by the upper and lower bands of Bollinger Bands.
Step 2: Buy as soon as the price touches the lower band
- When the price touches or moves below the lower Bollinger Bands, place a buy order.
- The stop loss can be placed below the lower band of the Bollinger Bands.
- The take-profit level can be set according to your desired level of risk and profit.
Step 3: Sell when the price touches the upper band
- When the price touches or moves above the upper Bollinger Bands, place a sell order.
- The stop loss can be set on the upper band.
- The take-profit level can be set depending on the level of risk and desired profit.
Trade at the Breakout point of the price channel after an extended sideways series Bollinger bands strategy.
The price channel Breakout trading strategy after a long series of sideways Bollinger Bands is a trading method to catch up with price fluctuations. Proceed as follows:
- Insert Bollinger bands strategy into the price chart of the asset you want to trade. Observe the chart and identify prolonged periods of sideways Bollinger Bands. In which, the price will move scalping ea by the upper and lower bands at a certain period (for example 20 days, 50 days…)
- Wait for the price to break one of the two Bollinger bands strategy clearly and decisively. Then, confirm the reliability of Breakout.
- Place a buy order if you see the price break out of the above band. The stop loss will likely be placed below the lower band. The take-profit level can be set according to your desired level of risk and profit. Place a sell order if the price breaks out of the lower band. The stop loss will likely be placed below the upper band. The take-profit level can be set according to your desired level of risk and profit.
Trade when Bollinger Bands fluctuate in price
There are two types of methods to carry out this type of transaction, which are:
- But when you see small price fluctuations with the expectation of price increases: The reason is that when small fluctuations take a break, the fluctuating trend appears again. Therefore, when Bollinger bands tighten deeply and prices close close together, a buying strategy can be used.
- Sell when you see high price volatility with the expectation that the price will decrease: The distance between the upper and lower bands will gradually widen if the price is too high or too low. At this time the market adjusts and price fluctuations will be small. Therefore, this is when investors execute sell orders.
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Some notes when using Bollinger bands strategy
- Investors need to combine Bollinger bands strategy with other technical analysis tools. At the same time, you should use your own experience to make wise investment decisions.
- The advanced Bollinger Bands default setting is typically 20 days for the moving average and 2 times the standard deviation for the bands. So it may not be suitable for all markets. Therefore, investors should experiment with different settings.
- Regularly monitor news and market events to make more accurate assessments of market trends.
Conclude
The information that Forex Trading shared above will help you better understand Bollinger bands strategy. This type of band is effective when combined with other strategies and indicators. Hopefully after reading this article, you can apply it to make transactions on the Forex exchange.
FAQS
Should I only use Bollinger bands strategy for trading?
You should not only use Bollinger bands strategy for trading because it can be risky and can lead to losses.
Are Bollinger Bands more effective than other indicators?
Each indicator has its advantages and disadvantages and its effectiveness depends on many different factors. Therefore, to evaluate whether this type of indicator is more effective than other indicators, you need to consider many aspects and practical experience.
Are there any fees for using Bollinger Bands to trade?
Use Bollinger bands strategy to trade with absolutely no fees.
