Bollinger bands is one indicator that traders often use in analyzing forex. This indicator is basically the development of Moving Average (MA), which is used is the MA 20 and added with the upperline and lowerline. By using Bollinger bands, traders can find out whether a pair is trending, sideways, volume decreases and volatility widen. Everything can be seen from this one indicator.
First, we will “peel” the lines first. Bollinger bands as already mentioned have 3 main lines, midline, lowerline or upperline. There are also those who call it midband, lowerband and upperband, with the same intention. Midband or midline is the MA 20 line, meaning that this half line is the benchmark in the last 20 sessions of a pair’s movement. Upperband is the upper boundary line which is calculated based on the highest average in the last 20 sessions. While lowerband is the opposite of upperband, the lower boundary line which is calculated based on the lowest average in the last 20 sessions. There are several things we can pay attention to:
- When BB shows horizontally, it means the market is in a sideways condition. The longer the sideways last, the longer the horizontal position will last.
- When the market is trending, the BB will widen then it will be in the direction of the candlestick movement. A bullish trend is usually indicated by candlesticks that are above the midband, even close to the upperband. Conversely for a bearish trend, where the candlestick will be below the midband and even close to the low band.
- Market volatility can also be seen. When the candlestick shrinks, it means the market is calm and volatility is low. Conversely, when the market is active and volatility rises, the BB tends to widen.
Trading Strategies and Techniques
BB trading strategies and techniques are also different from the others. We can group as follows:
- Follow the trend. If you are following a trend, BB can be used by looking at the slope of the trend. Additionally, as long as the candlestick is always above or below the midband, you can follow the candlestick for an order entry.
- Counter trend. BB is often used for traders who counter trend. It’s easy to do, the entry is only done when the candlestick touches the upperband or lowerband. When candlestick touches upperband, we can sell sell and vice versa when BB touch lowerband we can buy entry. Keep in mind, the counter trend is effective if the BB is sideways with a horizontal slope.
- The use of BB for forex trading is usually appropriate in sideways moving market conditions. BB is not suitable for trending markets because the candlestick will always be in one of the boundary lines of BB.
Trading techniques using this indicator do not guarantee 100% accuracy of profits. Trading techniques using indicators only help traders to see the possibility of future price movements. The risk remains and must be considered, therefore the Stop Loss placement must always be there.