Bollinger Bands (BB) indicator is one of indicator that is often used and applied by traders in the world of forex trading as a tool to see the possibility of currency pair price movements. This indicator is unique, that prices will never come out far from the lower and upper boundary lines of this indicator. In addition, this indicator is also effective for traders who want to make profit when market conditions are sideways. The upper and lower boundary lines can be used as a place to set orders against the direction when the market is sideways.
Meanwhile, the Parabolic SAR (PSAR) indicator is also an indicator that is quite often used by traders. Characteristics of this indicator is in the form of dots that become a benchmark for the movement of a trend will end or not. Uniquely, these points are precisely in the opposite position to the direction of the trend, so that many use this PSAR as a stop loss point (SL) which is better than manually set SL.
What if the two indicators are combined? Will it be a trading system that makes a profit? What about its use?
Before answering the questions above, take a look at the display of the chart that combines the two indicators.
Display of Bollinger Bands and Parabolic SAR indicators on charts
As shown in the figure, the PSAR dots and BB overlap and give each other signals that indicate the possible direction of a currency pair. The PSAR dot is also always inside or near the BB, indicating that both of them can actually provide information to the trader regarding the trend of a price.
In general, these two indicators are most effective when the movement of a currency pair is sideways. The weak point, PSAR is lagging indicators so there is a possibility that prices have changed direction before the PSAR point exchanges positions. This can be overcome by looking at the position of the candlestick on BB, whether it has touched the upper or lower limit. As long as the candlestick is still above the PSAR and above the midline of the BB, the bias is bullish or rising. Conversely, if the candlestick is below the PSAR point and also below the BB midline, then the bias will tend to be bearish or go down.
The slope of the two indicators is also an indication that the price will still be trending or not. It is unlikely that the two indicators give different signals in terms of the slope of this direction, so that both can be used as the basis of analysis to determine the direction of movement of a currency pair.
How do you use and order entry for these two indicators?
There are two opportunities to enter orders on this system, which is following the trend or against the trend.
- For those who follow the trend, orders are placed when the candlestick is above or below the BB midline, and PSAR confirms that the point is opposite.
- As long as the candlestick remains above or below the midline BB and the candlestick does not touch the PSAR point.
- Exit or TP can be done with several approaches. First, with PSAR, where if the PSAR point is touched, it is a sign that we have to get out of the market and we can take profit.
Second, if the slope of the BB changes and becomes flat, at that time we can consider leaving the market. Third, if the candlestick touches the upper or lower boundary line of BB. Those are some examples of execution of orders that have been placed.
- Meanwhile, for those who oppose the trend, these two indicators can be a reference even easier. Entry can be arranged by looking at BB, which is when the candlestick touches the upper or lower limit of the BB.
- PSAR here will act as a Stop Loss (SL) which keeps our trades from being protracted in holding losses. Exit is done when the candlestick touches the boundary line opposite the order or when the candlestick touches PSAR.
See the following picture.
Example of Entry by Following Trend with BB and PSAR
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 limitation 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.