Bollinger Bands (BB) indicator is an indicator that is often used by many traders, because of its nature which can provide direction and also the price volatility of a currency pair. This indicator consists of 3 main lines, namely the bottom, middle and top lines that follow the price movements of a currency pair. Candlesticks will always be within the range of these three lines, making it easier for traders to assess and analyze the movements of a currency pair.
Fibonacci, or which is discussed this time is Fibonacci Retracement (FR) is one of the indicator tools that use the golden ratio approach in calculating the possibility of price movements. FR calculates how strongly the price has reversed from its trend, and divides it into several levels based on golden ratio calculations.
What If the Two Indicators are Used Together?
Let’s see how it looks first.
Display of Bollinger Bands and Fibonacci Retracement on MT4 Chart
FR installed with the general provisions, the point 0 is installed at the highest or lowest point of the movement, depending on where the reversal direction. Like the example above, the reversal is pointing down so that the 0 point is set at the highest point of the candlestick. Meanwhile, if the opposite occurs, when the reversal is pointing up, point 0 will be installed at the lowest point.
Meanwhile for BB it is automatically installed according to the settings. In the picture above, BB is installed and will follow price movements. This BB will be a clue of the trend trend, whether the trend is still continuing or there will be a reversal of direction.
How Is Entry Trading Using BB and FR?
There are two entry approaches when using BB and FR, the first is how to follow trends (following trends) and the second way is against trends (counter trends).
- If follow the trend, we will focus on BB and see FR as a starting point to enter. For example, if the trend shows that BB is rising, then the available FR point becomes the benchmark for entry.
- It would be great if the FR point intersects with the BB midline or BB bottom line, which means the strength of the buyers gathered at that point.
- Meanwhile, if we choose to trade against the trend, then the FR point is the main reference, where the point becomes a source of entry.
- Like the example in the picture, when the 0 or 23.6 points are touched by the candlestick, then there we can do a sell order. Or it could be at another point as long as it hasn’t touched the 100 point of the FR.
Example of entry by using BB and FR in the MT4 chart
What about SL and TP?
We can determine Stop Loss (SL) and Target Profit (TP) with various approaches. The first approach is to use the FR level as SL and TP points. This FR level is very good to be used as a reference point for SL and TP because the point is constant and does not change, so it does not need an adjustment if the price changes.
BB can also be used as a benchmark SL and TP. It’s just that, because BB is dynamic and moves to follow the movement of the candlestick, then we need to make adjustments at certain points when prices change. This adjustment is to maintain that the SL and TP that we use are always within the BB range and not out of the existing range.
Or you can also combine the two. We determine that the meeting point between one FR level and one of the BB boundary lines is the SL or TP point, thus we can also see the strength of a price level and the strength of the buyer / seller at that price point. The strength of the seller or buyer can be taken into consideration whether the trend will continue or not, so we can determine whether to become a trader who follows the trend or against the trend.
What should be considered?
Keep in mind that a system using these two indicators does not provide certainty that profit will always be successful. Therefore, it is better if the loss limit must remain and be installed every time an entry is made, in the form of a 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.