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Bollinger Bands (BB) indicator is one indicator that is commonly used and automatically exists in the forex trading tools that we have. These indicator is often used and has been widely applied with various settings and combinations with other indicators. However, what if this indicator is paired not with another indicator, but with an approach called a candlestick pattern?
Candlestick patterns are not indicators, but an approaches to analyzing price movements by looking at the shape and pattern of the candlestick itself. Called a pattern, because the shape of these various kinds of candlesticks repeatedly and form a similar resemblance, so it is worth mentioning candlestick patterns. The candlestick pattern itself is part of an analysis called Price Action.
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What if the two are combined?
Before we further discuss how to trade using these two approaches, we can see the appearance of BB images on the MT4 chart.
Display BB on MT4 Chart
Why is there only one indicator in the picture? Because as discussed above, a Candlestick Pattern is not an indicator, but only a display by looking at patterns formed by several candlesticks. This pattern when combined with BB, at some point will be a good place for our entry orders and can generate more maximum profits when compared to only using BB alone or only with Candlestick Patterns.
Now, let’s take look how to use the two things above in our trading.
- BB will act as a sign that prices are approaching a turning point. Thus, we will focus on choosing against the trend.
- If we trade against the trend, the next focus is to look for candlestick shapes that show reversal.
- The most obvious example is the shape of a candlestick pattern from a doji. Doji is one of the many patterns in candlesticks that are common and are often used as a sign of reversal.
- The appearance of the doji at the lower or upper border of BB is a signal that the price is reversing.
- We can use this to make order entry for the relevant currency pair after seeing the doji appear.
Let’s take look again at the picture, to understand the purpose of the above statement.
“Doji” Candlestick Pattern on MT4 Chart
What if we want to follow the trend?
When we trade but want to follow the trend, then make sure the candlestick is always above or below the BB midline. The pattern that appears on the candlestick must be solid bullish or solid bearish, or at least the same candlestick. Another way, is to see whether the candlestick is near or always attached to the upper or lower limit of BB. If that happens, then profit opportunities by trading following the trend will be even greater.
The determination of TP and SL can also be done in various ways. The first is to use BB, if the candlestick touches the other side of the boundary line, then it’s time to get out of trading and take profit. The other, is to get out of the market when a reversal candlestick appears, so the order we have is most likely to decrease. There is also a determination of the number of pips, but this method is considered to be less effective considering the potential obtained can be greater, especially when prices continue to move up or down (trending).
For determining SL, it is the same as determining profit targets. Stop Loss can be placed on another BB boundary line (if trading follows the trend) or can also use the number of pips approach, for example 30 or 50 pips from the order opening price. A good TP should be a maximum of 5% of the total capital owned, so it does not burden the trader when exposed to SL.
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What should be considered?
Keep in mind that a system using these two indicators does not always guarantee profit and success. Therefore, it is better if the loss limit must remain and be installed every time an entry is made, in the form of Stop Loss or SL. Indicators are only tools to see what is likely to happen, not tools to see the future that will happen.
Always obey the rules when making transactions, because most traders make the mistake of breaking the rules they made themselves. This rule includes not opening new positions if the existing ones are not yet regarding SL or TP. Do not get carried away quickly when experiencing losses or when making a profit. Keep doing the analysis with good and focused mind to achieve forex trading strategy that are yielding consistent profits.