During forex trading, you must have heard about Bollinger Bands. This is a technical analysis tool developed by John Bollinger. A very “divine” tool that helps traders build effective trading strategies. Therefore, in this article, Forex Trading will introduce details from the concept of the Bollinger Bands indicator to how to install and use it to help you achieve the highest profits. Let’s see!
You may not know the meaning of Bollinger Bands
The Bollinger Bands indicator was invented by John Bollinger in the early 1980s. This indicator is also known as Bollinger Band, named after its inventor. It is made up of a moving average (MA) and the standard deviation of the price.
Bollinger Bands narrow
The narrowing is when the two upper and lower bands move closer and closer to the 20 SMA. The narrowing of the gap represents a period of low to minimal volatility. This perfect signal signals that volatility will increase again soon. It is considered a potential entry opportunity for investors to make a profit.
Besides, tightening and expanding often go hand in hand. As the moving bands widen, volatility drops sharply and exit rates increase. However, these fluctuations should not be considered trading signals. Because they cannot predict the upward or downward trend of prices.
Bollinger bands broke out
Every break that occurs above the two Bollinger band attracts great interest from traders. However, like the Bollinger squeeze, the breakout is also not considered a trading signal. Most investors mistakenly believe that when the price crosses either of the upper or lower bands, it is a signal to enter the market. However, the breakout point does not give us clear information about the trend or subsequent price volatility.
The Bollinger Band indicator also provides us with information that the price can only move within a certain range and it is difficult to go beyond that range. Therefore, Bollinger Bands has great potential in evaluating long-term, medium-term, and short-term trends. Regardless of the time frame, it delivers fairly accurate results.
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What are the advantages and disadvantages of the Bollinger Bands indicator?
Let’s dig deeper into the pros and cons of this interesting indicator!
What are the advantages of Bollinger Bands?
Bollinger Band offer the following advantages:
- Simple and easy-to-understand parameters: Bollinger uses simple parameters such as moving averages and standard deviations. It helps users easily understand and apply.
- Easy to recognize up and down signal: When the price crosses the moving average and goes out of the Bollinger band. This shows an acceleration of the trend. Meanwhile, a contact or close below the moving average and the lower Bollinger band indicates a deceleration of the trend.
What are the disadvantages of Bollinger Bands?
Although Bollinger Bands is a good indicator, it still has certain limitations.
- The inability to predict price breakout trends is a limitation in market analysis. Therefore, to predict market signals, investors need to combine the Bollinger Bands indicator with other technical indicators.
- The Bollinger Band indicator does not provide information about the end of overbought or oversold conditions. Although they indicate the market is in this state, it is impossible to predict when this trend will end. This is why traders need to set stop-losses. This is to protect your account in case the price moves unpredictably.
- Bollinger bands are only reliable and suitable in some cases. It works well when the market experiences little volatility. However, when the market has strong fluctuations, Bollinger band no longer provide accurate results.
How to install Bollinger bands on the MT4 platform
MT4 is one of the most popular and popular trading software today. Therefore, Forex Trading will provide you with instructions on how to install the Bollinger Band indicator on the MT4 trading platform.
Step 1: Open the MT4 platform, on the Menu bar, click Insert, hover over Indicators, select Trend; Finally, select Bollinger Bands.
Step 2: The Bollinger Bands dialog box will immediately appear.
- In the Parameters section, there will be items: Period (number of cycles), Shift, Deviation (deviation), Apply to Close (apply closing price type).
- In addition, traders can also change the color and thickness of the Bollinger band in the Style section.
- Investors can adjust parameters according to their own strategy. However, the default values of the Bollinger Bands indicator should not be changed.
- After you have filled in and double-checked the necessary information, simply click the “OK” button and the installation will be completed.
After installation is complete, you can trade using the manual method or the forex EA automatic trading software .
How to use Bollinger Bands?
To be successful in trading, learning and practicing go hand in hand. If you want to become a professional trader, don’t ignore the trading strategies using the Bollinger Bands indicator below.
Buy low, sell high
The upper band of the Bollinger Band indicator plays a similar role as a resistance line. While the lower band acts like a support line.
- When the price reaches the upper band, you can consider selling.
- When the price reaches the lower band, you can consider buying.
This helps you take advantage of price patterns moving between Bollinger Bands to decide when to buy and sell. With the goal of buying at a low price and selling at a high price. Buy low sell high is a popular and simple trading strategy. It is quite effective when the market is in a sideways phase and has no clear trend.
However, the strategy has high risks when the market experiences strong and sudden fluctuations. This is considered the simplest method of using the Bollinger Band indicator.
Bottleneck
When the price continuously fluctuates within a narrow range and maintains it for an extended period of time, it is a sign of a strong price movement in the future. However, identifying this sign is not easy for investors.
But with Bollinger Bands, this is different. It helps identify price fluctuations within a narrow range through the bottleneck phenomenon. When a bottleneck appears on the chart. It is a signal to traders that it is possible to prepare for strong volatility and to enter into a trade.
Placing an order is extremely simple, you can do as follows:
- Buy when the price breaks out and surpasses the accumulation zone.
- Sell when the price breaks out and goes down from the accumulation zone.
Combine Bollinger Bands with a few other indicators
- Combining Bollinger Bands and RSI
This method is considered “two swords match each other” and is an effective strategy. When the market does not have a large and clear change in trend. It allows identifying overbought or oversold areas, determining whether the price is too high or too low. Although simple, this information is very valuable, helping to confirm buying and selling decisions.
This is not the greatest strategy, but if you know how to combine Bollinger Bands with RSI, determining reasonable entry and exit points will become easy.
- Combine Bollinger Bands with MACD
The Bollinger Band indicator helps recognize the cyclical nature of price fluctuations. While MACD is a trend-following momentum indicator, combining these two tools can increase certainty in trading. As they provide trend analysis and measure the strength of existing trends with similar fluctuations.
Therefore, traders often use these two indicators to evaluate the deceleration or acceleration phase. At the same time, it predicts an upcoming breakout. Furthermore, Bollinger Bands can help investors identify trends and position orders appropriately.
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In-depth Bollinger Bands indicator
Some popular strategies using the Bollinger Band indicator that professional investors prefer to apply.
Strategy 1: Break Bollinger Bands
The Bollinger Band indicator breakout strategy is a simple and long-term trading method. The breakout occurs when the candle’s closing price crosses the Bollinger band. Investors need to combine support, resistance lines and other indicators.
- Price breaking the resistance line is a buy signal.
- Price breaking the support line is a signal to sell.
Strategy 2: Trade according to market fluctuations
With this strategy, investors often apply two main methods:
- Buy when the price has a small range with the expectation that the price will increase: After a period of small range fluctuations to take a break, there is often a sharp move again. Therefore, investors buy when Bollinger bands narrow and prices close close together. This is a volatility buying strategy.
- Sell when the price has a large amplitude (very high price) with the expectation that the price will decrease: When the distance between the upper and lower bands becomes increasingly distant. The market needs to be adjusted and prices will have a smaller amplitude. This is also the right time for investors to sell and place trading orders.
Epilogue:
Hopefully, this article has helped you answer your questions about Bollinger Bands. Forex Trading hopes that you can apply the useful knowledge we have shared. However, to achieve success in the foreign exchange market, it is important that you realize your own limits before starting any trade. Or improve your knowledge base through useful articles from Forex Trading.
Frequently asked questions
What are Bollinger Bands?
Bollinger Bands is a technical analysis indicator created by John Bollinger for the purpose of measuring market volatility. This indicator combines the moving average (MA) and standard deviation.
Bollinger’s structure consists of several parts
The structure of the Bollinger Bands indicator includes three parts:
- Middle Band (middle band)
- Upper Band (upper band)
- Lower Band (lower band)
In what possibilities does the value of the Bollinger Bands indicator lie?
The value of the Bollinger Band indicator lies in the following capabilities:
- Identify market trends and stages
- Determine the tightening point and the breakout point
