Having previously discussed about two indicators above and how to use them, we will now try to combine the two indicators to see how to use them. Moving Average and Bollinger Bands have been discussed separately, can be seen in the article Simple Trading Strategy with Moving Average and Simple Trading Strategy with Bollinger Bands.
What if the two are combined? From its characteristics, Moving Average (MA) and Bollinger Bands (BB) look complementary. MA is the basis of BB and BB is the development of MA. MA provides information on trend exchange, BB gives information on the direction of the current trend. MA gives a hint of bullish and bearish bias, BB gives a hint whether it is too bullish or too bearish.
Combining two or more indicators is common, but this time we will try to do a little experiment by combining the two. Later it will be seen, which one will be more effective whether by combining the two or when the indicators are displayed themselves which are more effective.
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The display of both indicators can be seen in the following image.
The Display of BB and MA
Even though it looks crowded and full of lines, we can do an analysis with these two indicators. For MA 20 (green line), it is seen not far from the center line of BB because actually the center line of BBwhich is also MA 14. While in the case above, MA 50 (yellow line) seems to move wider because more data is taken. The meeting point between MA 20, MA 50 with one of the lines from BB is a point that can be used for entry.
It would be better if the meeting point occurred between the three. This will give a strong signal that a change in trend will occur, or at least a reversal of the trend will occur. Meanwhile, if the candlestick is above the MA 20, MA 50 and the mid line BB, then it is certain that the uptrend will still be strong. Conversely, if the candlestick is below MA 20, MA 50 and the mid line of BB, the downtrend will still be very strong.
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Entry example by using BB and MA
Note the picture above, at the arrow there is a meeting of MA 20 and MA 50 which is also adjacent to the upper line of BB. This intersection of MA lines suggests there will be a change in trend and direction of the candlestick. And also occurs at the upper boundary line BB, which tends to declare feasible to sell energy.
The conclusion of these two signs is that the candlestick will form a bearish candlestick and the price will go down. It was proven next time, as seen in the picture the price actually went down even passed the lower limit of BB. At that point, we can exit and close trading positions to get profit.
Secondly, by following the trend. As long as the candlestick is above the MA and the midline of the BB, or the candlestick is below all indicators, then we just follow the trend that is happening. See the example in the image below.
Candlesticks Above MA and Middle Line BB
The bias and direction of the candlesticks always point upward, as long as MA 20 and MA 50 have not intersected. In fact, every time there is a correction down, this is a good place to do a buy. MA is an indicator that in the medium term the trend is still up, while in the short term to make an entry we can use BB.
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For profit and stop loss targets, can be done by using one indicator or both. We can put a stop loss on the upper or lower line BB, we can also close all positions when the MA intersects. Or, it could also use the pips approach, such as stop loss at 30 or 50 pips and target profit at the same value.
By using these two indicators, it is expected to reduce errors during candlestick analysis due to being too fast or too slow to execute orders. The nature of MA which is a leading indicator and BB which is lagging indicator, complements the shortcomings that may arise from each indicator.
What to Look For?
These two indicators are just tools, the decision to trade remains with the trader himself. Resting on the indicator does not mean that the indicator will always be 100% correct. A simple but profitable trading strategy must also calculate risk. If the risk can be measured, then this forex trading system will make consistent profit.
Stop loss must always take precedence and always be placed in every trade. Most trading mistakes are underestimate this problem and leave the position open until the losses drag on and large. Therefore, always set the risk of loss in the form of a stop loss placement first and then calculate the possibility of getting profit.