Even beginners in Forex have heard about technical analysis using Bollinger bands. But the main question: when to trade forex Bollinger bands? After all, this answer is the key motivation for learning how Bollinger bands in Forex work. Of course, you can use the best Forex robots and simplify your work in the market several times, getting excellent results and good profits. However, we still suggest that you should be aware of what is Bollinger bands in Forex so that you are not afraid of such concepts as trend trading or Bollinger compression.
What are Bollinger bands in Forex?
Learning how to read Bollinger bands in Forex is essential for analyzing market volatility and identifying potential buy or sell signals. The indicator Bollinger bands Forex consists of three lines: the moving average and upper and lower bands, which are placed at a given number of standard deviations from the moving average. The upper and lower bands are two standard deviations above and below the moving average.
When the bands are close, it indicates low volatility; if they are far apart, it shows a more volatile market, and traders can choose a breakout or trending strategy. That is, traders typically consider prices overbought when they touch the upper band and oversold when they touch the lower band. Bollinger Bands also provide essential information, such as trend continuation or reversal, periods of consolidation, upcoming volatile breakouts, possible market tops or bottoms, and potential price targets. So, you can use Bollinger Bands to identify potential breakouts or determine the strength of a trend.
How do Bollinger Bands Work?
As you already know, the essence of using Bollinger bands Forex is to monitor whether the bands are narrowing or widening, which directly indicates how to proceed in the market, which deals to open, and which, on the contrary, to close. Let's repeat the main thing:
- The upper band indicates the level of overbought;
- The lower one is at the oversold level;
- The moving average line in the middle of the bands can help determine the overall trend of the asset.
These are the buy and sell signals you need. When prices touch the lower band, it may indicate that the asset is oversold, and a buy signal may be generated. Similarly, when prices touch the upper band, it may indicate that the asset is overbought, and a sell signal may be issued.
Bollinger Bands can also be used with other technical indicators, and trading strategies to help make more informed trading decisions.
How to read Bollinger bands in Forex
Bollinger Bands resemble an envelope that creates upper and lower bands around the price, with a moving average between them, usually the 20-day simple moving average (SMA).
Look at the graph. You could see no difficulty finding them and assessing the situation. How to use Bollinger bands in Forex trading? Remember that the price is attractive when it is close to the lower band and relatively overpriced when it is close to the upper band.
- The upper band is calculated by adding two standard deviations to the moving average.
- The lower band is calculated by subtracting two standard deviations from the moving average.
- When the price of a currency pair is trading within the upper and lower bands, it is said to be in a period of low volatility. Conversely, when the price breaks out of the bands, it indicates higher volatility and a potential trend reversal.
- When the price moves within the bands, traders can look for potential breakouts outside the bands, which may indicate a new trend direction.
These are simple rules that you will easily learn. However, we also recommend that you read about Forex Trading Mistakes, and it allows you to avoid situations when you misapprehend the graphs or act impulsively.
Forex Bollinger bands strategy: how to use?
In Forex trading, the default setting for Bollinger Bands is (20.2), which means that the Simple Moving Average (SMA) is set to 20, and the upper and lower bands are two standard deviations from the SMA. When trading Double Bollinger bands Forex, technical analysts are particularly interested in price action near the edges of the bands. While outer bands can provide a sense of confidence in identifying resistance or support levels, they do not provide buy or sell signals by themselves.
Bollinger Bands can be applied to any market or security and are a great starting point for beginners. As the number of periods increases, so should the number of standard deviations used. For example, two and a half standard deviations are recommended for 50 periods, while one and a half standard deviations work well for ten periods.
Knowing this, you can trade according to the trend or wait for a breakthrough. You can also check out Forex Trading Tips for even more profit opportunities.
Trend trade
Popular is the use of Forex charts Bollinger bands for trend trading. The lower band acts as a support level, and when the price touches it, traders use it as a signal to enter a long trade (buy). This approach works for both uptrends and downtrends. Take-profit levels (limits) are usually derived from the upper and lower bands based on the direction of the trend. The upper band is used as the take-profit level in this scenario.
Trend trading using Bollinger Bands is a straightforward approach to the Forex market. You need to do the following:
- Determine the trend in the market.
- Use the upper and lower bands and price action to identify entry points.
- Use the upper and lower bands as targets for taking profits.
It allows you to trade using Bollinger Bands with minimal risk and maximum potential profit.
Breakthrough strategy
This strategy is a trend-following approach with simple rules:
- Open a long position if the previous closing price breaks above the upper band.
- Open a short position if the previous closing price falls below the lower band.
You can also use other indicators, such as RSI or MACD, to confirm market entry signals. Remember to set stops to limit possible losses.
Squeeze strategy
A Bollinger squeeze strategy is a technical Forex trading strategy that uses relative volatility to determine entry and exit points. As mentioned earlier, Bollinger Bands contract when volatility is low and widen when volatility is high. The squeeze forex Bollinger bands strategy looks for breakouts above or below the bands used as entry signals, depending on the trend.
Traders are waiting for a price explosion from one of the bands, which indicates the direction of market movement. If the price moves up and crosses the upper band, traders see this as a signal to enter a long position. If the price moves down and crosses the lower band, this can be a signal to enter a short position.
For the Bollinger squeeze strategy, it is also essential to use other analysis tools such as support and resistance, trend indicators, trading volume, and others.
So:
- Look for low volatility.
- Wait for the breakout of the upper/lower band.
- Close the trade when the price reaches the moving average.
The Bottom Line
Bollinger Band Forex is a remarkable technical analysis tool that helps you identify trends, volatility, and potential trading signals. At the same time, traders can resort to trend trading, breakout trading when prices break out of the upper or lower band, and also use the Bollinger Squeeze trading strategy.
Such analysis shows the market's volatility and helps predict potential breakthroughs (and, therefore, opportunities for obtaining excellent profits). It is one of the most popular tools for receiving signals to enter a trade or close a position. But best of all, Bollinger Bands works with other indicators and analysis methods for the most effective trading strategy. Despite the incredible effectiveness of such analysis, the trader still needs to eliminate all risks. That is why professionals advise using additional options to confirm the correctness of each subsequent step. And do not forget about stop loss and other risk management options that will protect your capital and help multiply profits.
