What are Bollinger Bands a question many investors wonder about? For investors who use technical analysis to invest, this term is no longer unfamiliar. This is a familiar indicator in financial investment to build effective construction strategies. So how to use this indicator? What is the meaning of Bollinger Bands in technical analysis? Let’s join Forex Trading to learn more details about how to use this indicator right away!
What are Bollinger Bands? Things to know when using a combination of indicators
To invest effectively, investors need to combine both fundamental analysis and technical analysis. Technical analysis and fundamental analysis both require investors to have solid professional knowledge.
What is technical analysis when trading Forex?
Technical analysis helps investors predict future market behavior based on past price movements and trading volumes. This method is widely applied to products and other assets in traditional financial markets.
But it is also a necessary component of the cryptocurrency market. Technical analysis is the analysis of past and present prices to predict future prices through price charts. Today’s technical analysis has its roots in Dow theory attributed to Charles Dow. Developed around 1900, this theory focuses mainly on price movements.
The basic idea proposed by the Dow Theory is that prices reflect the balance between supply and demand (or investors’ expectations and fears). And most importantly, the imbalance between supply and demand is the main cause of the upward or downward trend of assets.
How to calculate Bollinger Bands in Forex
The formula for Bollinger Bands is quite simple. They include three lines which are the middle band or moving average, followed by the upper and lower bands. The middle band is calculated as the average of the closing prices. With the upper band equal to 20-day SMA + 2 x 20-day Standard Deviation. With the lower band equal to the 20-day SMA – 2 x 20-day Standard Deviation.
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Learn in detail what are Bollinger Bands in Forex
To apply Bollinger Bands to technical analysis in forex. Investors need to clearly understand the concept and meaning of this indicator line.
The basic concepts of what are Bollinger Bands?
John Bollinger, the creator of Bollinger Bands, defines Bollinger Bands as “a technical analysis tool, they are a trading line”. Bollinger Bands use a statistical measure called standard deviation to determine where potential support or resistance may lie.
Bollinger Bands measures market volatility and provides investors with many trading signals. Includes trend continuations or trend reversals. A period of time where there can be a major volatility breakout. And finally, it helps investors find the top or bottom of the market as well as potential price targets.
Effective Bollinger Bands indicator trading strategies
Building an investment strategy is very important for every investor. Below are some methods combined with the Bollinger Bands indicator for the most effective investment strategy.
Technical analysis of the Bollinger Bands squeeze indicator trading strategy
The characteristics of the Bollinger Bands indicator are the two upper and lower bands of the indicator. They almost cover all price lines. The market always fluctuates back and forth between strong and weak changes. When they fluctuate up or down at a small amplitude, this is a sign of strong fluctuations about to appear.
At this point, the presence of a bottleneck area will be confirmed. Investors will be fully aware that that area is about to explode and this is the right time to trade.
At this time, two cases may occur. First, if the price breaks out of the narrow accumulation zone, it will tend to go up and there will be buy orders. If the price breaks out of the accumulation zone in a downward direction, place a sell order.
The strategy for combining reversal patterns with what are Bollinger Bands?
Using Bollinger Bands combined with candlestick reversal patterns is also a method used by many investors. The basis of this method is that the price tends to return to the SMA 20 line. To do this, investors first need to consider the support and resistance zone.
Next, consider the shape of the Bollinger Bands in those areas. Look for reversal pattern areas and investors will find the appropriate entry point.
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Use the Bollinger Bands indicator to trade deeply in forex
As a general rule, each price range indicates whether you should trade in the direction of the trend, buy or sell, depending on whether the trend is bullish or bearish. Basically, if the price is in the upper zone, you will buy, if it is in the lower zone, you will sell.
Use the Bollinger Bands indicator in Scalping trading
Some technical indicator terms when trading Scalping EA that investors need to know include RSI, H1, EMA, and Oscillator. The most suitable time frame for Scalping trading is the M1, M5, or M15 frame. The main target is the H1 points and is placed right at the H1 frame.
The stop loss levels are the lines below that support the temporary H1 axis for long-term transactions. Or above the resistance level if trading short-term.
In-depth analysis of Bollinger Bands
With the Bollinger Bands breakout strategy, this is a long-term trend following strategy. Investors need to take a long position if the previous close break above the upper band. And a short position if the previous close falls below the bottom channel.
The image above shows a daily chart of the GBP/USD currency pair with a 200-day moving average with a standard deviation of 2.5. The downtrend continues in the latter part of the chart. With the counter-trend trading strategy, the market is within a limited range. As the market approaches, we will likely see a reversal soon. However, responders need to be extremely careful and practice risk management. Remember that these levels are points of interest and eventually the price will move away from those areas.
Conclude
Above is the answer of Forex Trading to the question of what are Bollinger Bands. The use of this indicator is extremely popular among investors. However, traders should also be careful not to overuse it. Investors can combine the Bollinger line with other indicators such as MA, and MACD to give more specific signals.
FAQs
What should you keep in mind when combining Bollinger Bands with the RSI indicator?
First, we need to consider whether the price movement will return to SMA 20 or not. Next is to watch for divergence when the market peaks.
Should Bollinger Bands be applied when doing technical analysis in forex?
Each investor will have different strategies and expertise. Whether or not to use it depends on the needs of each investor.
What are the tips when trading with Bollinger lines?
Bollinger Bands are based on simple moving averages. This is due to standard deviations and they are calculated using moving averages.
