Many traders use the Bollinger Bands indicator in trading, because this indicator is quite easy to be known and understand. Bollinger Bands are actually the development of Moving Average (MA), where the MA used MA 20 which is then given an additional upper and lower limit. The upper and lower limits are dynamic, can be narrowed or widened depending on the volatility that occurs.
Display of Bollinger Bands (Yellow Line)
As seen in the picture above, this trading technique is based on Bollinger Bands with an interval of 20. In the picture it stated (20) which means the setting for this indicator is the last 20 candlesticks. Automatically, when we want to apply this indicator then that number will appear. We can replace this period value, but in general, traders in the world use the values as above.
Upper and lower boundary lines are the difference values from the midline of Bollinger Bands. That is, this difference is actually the value of the Moving Average which is added according to the settings. Automatically, this difference value is 2, as seen in the image below.
Bollinger Bands Settings
Because everything is based on the Moving Average, this indicator is actually an extension of the function that is in the reading of the Moving Average indicator. However, because there are shortcomings here and there, Bollinger Bands come to provide a better picture of the likelihood of a move that will occur.
Next, after knowing the Bollinger Bands and how they look, we can first set the values in this indicator. In the settings the words Period, Difference, Shift and Application will appear. The period is the candlestick interval or time that will be the basis for calculating the middle band or center line. This middle line is also what was called the MA. The value is automatically 20, but we can change it as we wish. Maybe there are more in accordance with 30 or 50 or other amounts, it is okay to adjust the Period to that number. However, most analysts do not usually change this period.
Then is Difference. Difference is used to determine the upper and lower lines which are visible borders. In the picture you can see the difference automatically in number 2, which means that the difference between the upper and lower boundary lines is an interval of 2 candlesticks or 2 units of time. We can replace this difference with another value, but it should be no more than 5. This is because if the Difference is too wide, it is feared that it cannot capture the smallest movements of a currency.
Then is the Shift or Deviation. We can leave this at 0, unless we want to see the deviation when the market is unstable. In certain cases when prices move too fast, we can “smooth” the appearance of Bollinger Bands with this deviation. However, if not in such circumstances, there is no need for adjustments to this arrangement.
Finally, the “Apply To” setting function in the previous image. If we click on the selection, a display will appear like this:
Menu Options of Apply To
Here are the intentions of the choices in the picture:
- Close, Bollinger Bands (BB) will calculate the line display using the last closing price data from a candlestick.
- Open, BB will calculate the line display by using initial opening price data from a candlestick.
- High, BB will calculate the line display by using data from the highest value of the candlestick.
- Low, BB will calculate the line display by using data from the lowest value of the candlestick.
- Median Price, BB calculates the line display by using the middle value of the highest value and the lowest value of the candlestick.
- Typical Price, BB calculates the line display by using the average of the highest value, the lowest value and the closing value of the candlestick.
- Weighted Close, BB calculates the line display by using the average of the highest value, the lowest value and the closing value of two candlesticks.
- Previous Indicator Data, BB calculates using the previous indicator data.
- First Indicator Data, BB calculates using data from other indicators that first existed.
From all the choices, traders usually use point 1 to 4. However, we can also choose other options that suit our trading strategy and trading techniques. We should choose based on the trading system that we will use and choose the most comfortable for trading.
How is Simple and Profitable Trading Strategy with Bollinger Bands?
A simple trading technique using Bollinger Bands is to buy when the candlestick touches the bottom line of the indicator and sell when the candlestick touches the top line of the indicator. See the following picture for examples of buy and sell entries.
Example Entry Position
From the picture above, we can do a buy order when the candlestick touches the bottom line and sell when the candlestick touches the top line. It’s easy and can make a profit. The profit target is also clearer, when the buy target is the upper line of BB and when sell the target is the lower line of BB. If done according to the plan above, then this forex trading technique can be consistent profit in the future.
The thing to remember, this is data so that the more data entered, the better the analysis. Therefore, you should use this trading technique with a large time frame, a minimum time frame of 1 hour (H1). The possibility of accuracy will be higher if the time frame used is wider. Time frames functioned as a container to see how much data can be calculated, therefore the wider the time frame used, the higher possibility of this technique being a simple but profitable trading technique.
Secondly, it is possible for Bollinger Bands to widen or narrow, especially for the upper and lower lines. This is because the length of the candlestick also varies which is the basis for calculation for the upper and lower limit of this indicator. When the line widens, it means that volatility also increases, so we have to be more careful about entry orders. Meanwhile, when the line narrows, it means the market is in a quiet condition and possibly will move within a narrow range.
Finally, in terms of maintaining the security of the amount of money in the account. Stop loss is required in every trade with any trading technique. In this case, most traders recommend giving a tolerance of failure or a maximum loss of 5% of the total value of money. That is, if in your account has a capital of $ 100, the maximum loss that can be taken is $ 5. From this value, then you can determine the number of pips you want to take to achieve stop loss and also the amount of lots to be taken.
Please try and wish that this forex trading technique consistent profits for the future of your trading.