In the world of Forex trading, Bollinger Bands are one of the most popular and powerful tools for measuring market volatility and identifying potential buy and sell points. Bollinger Bands are no longer strange and have become an indispensable part of the toolbox of many professional traders when doing technical analysis. Today, let’s join Forex Trading to learn in detail what is Bollinger band is and how they work in the trading world.
Overview of what is Bollinger bands in technical analysis
what is Bollinger band in technical analysis? Bollinger Bands is a technical analysis tool widely used in Forex trading.
Define what is Bollinger band in technical analysis.
Bollinger Bands is a technical analysis tool developed by John Bollinger in the 1980s. It is used to measure price volatility and identify potential buy/sell points in the market. financial school. This tool provides important information about market volatility and helps traders better understand the nature of trends and price movements.
Meaning and importance of Bollinger Bands in technical analysis?
Here are some of their main meanings and importance:
Measure volatility:
- When the band opens, volatility increases, and when the band contracts, volatility decreases.
- This provides traders with an overview of the market.
Identify buy and sell signals:
- When the price touches or crosses the lower band, a buy signal may appear.
- When the price touches or surpasses the upper band, a sell signal may appear.
Identify trends and market segments:
- Price increases or decreases according to a specific band. These can have an upward or downward trend.
- Price moves between bands. This could be a fluctuating market or market session without a clear trend.
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What are the characteristics of the Bollinger band that you need to know for effective technical analysis?
- Moving averages often act as an average support or resistance level.
- The upper and lower bands create a dynamic border around the price, within which the price tends to fluctuate.
- The width of Bollinger Bands represents the level of market volatility.
- Buy and sell signals
- Identify trends
- Bollinger Bands can also detect high volatility and sense the amplitude of the market.
How to use Bollinger Bands in trading strategy?
Reversal pattern trading strategy:
- But when the price touches the lower band and forms a Bullish price reversal pattern: Shows that the downtrend may end and the uptrend may begin.
- Sell when the price touches the upper band and forms a Bearish price reversal pattern: This shows that the uptrend may end and the downtrend may begin.
Bollinger Bands contraction trading strategy:
- Buy when Bollinger Bands are narrowing: Shows low price volatility and could be a sign of an impending price breakout.
- Sell when Bollinger Bands widen: Shows high price volatility and could be a sign of an impending trend reversal.
What are the factors that form the what is Bollinger band?
Bollinger Bands are formed based on the following factors:
- Moving average
- Upper band
- Lower band
How to effectively use the Bollinger band?
To effectively use Bollinger Bands, you can apply the following strategies:
How to calculate what is Bollinger band?
Moving average (MA):
- The commonly used MA is MA 20 which means the average value of closing prices over the last 20 days.
Recipe:
MA20 = ( Closing price on day 1 + Closing price on day 2 + … + Closing price on day 20 ) / 20
Standard deviation:
- Standard deviation measures the price volatility relative to the MA.
Recipe:
Standard deviation = √(∑(Closing price – MA20)ˆ2 / 20)
Upper band:
- The upper band is above the MA.
Recipe:
Upper band = MA20 + (Number of standard deviations * Standard deviation)
Lower band:
- The lower band is below the MA.
Recipe:
Lower band = MA20 – (Number of standard deviations * Standard deviation)
How to determine support and resistance levels for technical analysis of Bollinger Bands?
Support level:
- Support levels usually appear when the price touches or near the lower band of the Bollinger Bands and begins to reverse and increase again.
- This is the area where selling pressure decreases and buying pressure increases, creating conditions for prices to increase again.
- Traders may consider opening a long position or enhancing an existing position when the price touches or contacts the lower band and buy signals appear from other technical indicators such as candlestick reversals or RSI analysis. (Relative Strength Index).
Resistance level:
- Resistance usually appears when the price touches or is near the upper band of the Bollinger Bands and begins to reverse and decrease again.
- This is the area where buying pressure decreases and selling pressure increases, creating conditions for prices to fall again.
- Traders may consider opening a short position or enhancing an existing position when the price touches or contacts the upper band and sell signals appear from other technical indicators such as candlestick reversals or RSI analysis.
After determining the support and resistance levels, you should take the additional step of Backtesting MT4 to test the performance of that trading strategy.
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Determine stop loss and take profit points for trading strategies
- Stop loss point: Placed below the lower Bollinger Bands for buy orders and above the upper Bollinger Bands for sell orders.
- Take Profit Point: Set above the upper Bollinger Bands for buy orders and below the lower Bollinger Bands for sell orders.
Combined with MACD technical indicator
Combining Bollinger Bands with the MACD technical indicator is an effective Bollinger bands explained trading method. MACD Band Strategy what is Bollinger band? The MACD and Bollinger Bands strategy refers to a trading method that uses both indicators in analyzing and trading the market. The combination of MACD and Bollinger Bands can provide greater insight into the current market and help predict how volatile it may be in the future.
The strategy goes as follows:
- A buy signal is formed if the price breaks above the upper band and the MACD line crosses above the signal line and increases.
- A sell signal is formed if the price breaks below the lower band and the MACD line crosses below the signal line and goes down.
Here, we will take a specific example to help you better understand this transaction:
- From the chart, you can see many signals, both long and short, as the price fluctuates from one band to another.
- The first is a sell signal when the price touches the upper band and the MACD shows a hidden bearish divergence.
- The next signal is a buy signal when the price retests the lower band after leaving it for a while.
- The subsequent reversal from the upper band is also a short signal. Then comes the buy signal and finally the latest short signal still comes out.
summary
Bollinger Bands – a powerful and popular technical analysis tool in financial trading, has helped traders and investors better understand market volatility and identify potential buy and sell points. Through the article, Forex Trading has answered the question of what is Bollinger band with detailed instructions on how to use this tool in the hope that readers will have a newer and more detailed view of them. Understanding how it works and applying it effectively in practice, Bollinger Bands can be an important tool for you to achieve success in the financial markets.
FAQs
What are the uses of Bollinger Bands?
- Measuring market volatility
- Identify trends
- Potential buying and selling points
Tools that can be combined with what is Bollinger band?
Bollinger Bands are often combined with other technical indicators to enhance trading signals and identify market trends such as:
- MACD
- RSI
- Moving average.
Are Bollinger Bands suitable for all types of markets?
Bollinger Bands can be applied to most types of financial markets, including:
- Stock
- Foreign exchange Forex
- Goods
- Cryptocurrency
