Bollinger Bands is one of the leading technical analysis indicators in trading. With the signals that this indicator brings, you can predict price action in short and medium terms very accurately. So what is the Bollinger Bands indicator and How to use it reasonably and effectively in Forex trading? In today’s article, I will help you to clarify it all.
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What is a Bollinger Bands indicator?
Bollinger Bands is the name of an indicator taken after the name of a trader who invented this indicator. This is a technical analysis indicator that is heavily used in market analysis. When combined with other tools, the signals that Bollinger Bands offers investors are very accurate.
Bollinger Bands indicator structure
Bollinger Bands consists of 3 main elements:
+ The topmost is the Upper Band – Green.
+ In the middle, it is the Middle Band. This is the SMA20 (average closing price of 20 candlesticks) – Orange.
+ The bottommost is the Lower Band – Red.
How to use Bollinger Bands in determining market trends
Traders use Bollinger Bands for many different purposes. However, in general, it carries the following two important signals.
Price signals to follow the trend (Uptrend or Downtrend)
This is a visual signal that Bollinger Bands offers to be able to identify the ongoing price trend. Specifically:
+ The price is in an uptrend
In an uptrend, prices usually create Japanese candlesticks in the upper band zone (the zone limited by the 2 upper and middle bands). When the price crosses the upper band, it tends to fall back into the Bollinger Bands. When the price touches the middle band (SMA20), it tends to rebound.
+ The price is in a downtrend
On the contrary, in a downtrend, the price creates Japanese candlesticks in the lower band zone (the zone limited by the 2 lower and middle bands). When the price falls out of the lower band, it tends to bounce back into the bands. When the price touches the middle band (SMA20), it tends to go down.
Signals when the market is moving sideways
This is the most effective signal that Bollinger Bands gives to traders. When the price goes sideways, it will fluctuate within the Bollinger Bands. Especially, when deviating from this Bollinger the price will adjust back inside.
How to effectively trade Forex using the Bollinger Bands indicator
For seasoned traders using Bollinger Bands, in many cases, this indicator alone is enough for them to open orders with extremely high win rates. Here are some popular trading strategies using Bollinger Bands.
Strategy 1. Trade according to the upper and lower bands of the Bollinger Bands indicator
This trading strategy is very simple and is especially effective when the market is sideways. I will guide you in detail on the entry points, stop-loss, and take-profit so that you can understand how to trade.
Conditions: The H1 Japanese candlestick chart and the sideways market. Bollinger Bands indicator (20,2).
Open a BUY order with the Bollinger Bands indicator as follows:
+ Entry Point: When the price crosses the Lower Band of the Bollinger Bands with a red bearish candle.
+ Stop-Loss: Place at the nearest Support before the price breaks out of the Lower Band
+ Take-Profit: When the price hits the Upper Band of the indicator.
Open a SELL order with the Bollinger Bands indicator as follows:
+ Entry Point: When the price crosses the Upper Band of the Bollinger Bands with a green bullish candle.
+ Stop-Loss: Place at the nearest Resistance before the price breaks out of the Upper Band
+ Take-Profit: When the price hits the Lower Band of the indicator.
Strategy 2. Trade with the Middle Band of the Bollinger Bands indicator
With this trading strategy, your trade will have a more accurate probability when the price follows the trend. Therefore, before opening an order, make sure the price is in a certain trend. See how to place orders below to understand.
Conditions: The H1 Japanese candlestick chart and a market with a trend (an uptrend or a downtrend). Bollinger Bands indicator (20,2).
When the price is in an uptrend, place a BUY order with the Bollinger Bands indicator as follows:
+ Entry Point: When the price hits the Middle Band and then rebounds. On the price chart, the signal will be a pair of red-green candles touching the middle Band.
+ Stop-Loss: At your nearest Support before the price hits the Middle Band and rebounds.
+ Take-Profit: When the price hits the nearest Resistance before the price enters an uptrend.
When the price is in a downtrend, place a SELL order with the Bollinger Bands indicator as follows:
+ Entry Point: When the price goes up, touches the Middle Band, and then declines again. On the price chart, the signal will be a pair of green-red candles touching the middle Band.
+ Stop-Loss: At your nearest Resistance before the price hits the Middle Band and declines.
+ Take-Profit: When the price hits the nearest Support before the price enters a downtrend.
To conclude
There are many other Forex trading methods and strategies that are based on the Bollinger Bands indicator. All will be introduced in the following articles. Proficient use of Bollinger Bands is a technique you need to master in trading. Get acquainted with the Bollinger Bands indicator on a Demo account today. Goodbye and wish you a successful transaction.
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The post What Is Bollinger Bands Indicator And How To Use It Effectively In Forex appeared first on How To Trade Blog.
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