Bollinger bands are well known trading tools used by forex traders and technical analysts. When trading forex, traders are always looking for price increment moves to make profits. This makes trend and volatility recognition an important part of any successful trading strategy.
When it comes to trading markets, forex trading is a prevalent market globally, with more activity compared to the stock market. The trick in forex trading is in the ability to take advantage of even the slightest exchange rates changes. This is how traders are able to make profits from trading different currency pairs from beneficial selling or buying points and prices.
Whenever a currency price is predicted to go up, traders invest in the currency and wait for the perfect trade off point to sell for a profit. When the price goes down, a trader sells the currency just before it drops to avoid making losses. This is made possible by technical analysis tools like Bollinger bands.
Understanding Bollinger bands
Designed by John Bollinger, Bollinger bands can be termed as technical analysis tools that forex traders can use to predict and analyze trend lines two standard deviances away from an SMA (Simple Moving average) currency Price. The goal of the Bollinger bands is to make it easier for traders to identify when a currency asset is oversold or overbought.
Bollinger bands work by signaling volatility changes in a trade. For most currency pairs considered steady-range securities, Bollinger bands are strong signals when it comes to selling or buying. While it is an ideal tool to have, Bollinger bands can sometimes lead to losses and stop-outs. Therefore, traders are required to look at other factors when trading based on Bollinger bands.
For you to use Bollinger bands successfully, you need to understand how it works. They comprise an upper and lower bands set at two deviances distance from the 21-day SMA of the currency pair. The band, in this case, will show the price volatility against the moving average, where traders should anticipate for a price movement in any direction between the upper and lower bands.
As a Forex trader, you can make use of these two Bollinger bands as indications for placing buy and sell orders on the lower and upper band limits, respectively. This strategy is ideal for currency pairs following a range pattern, as it can be expensive in the event of a breakout.
Reading price volatility
Bollinger bands are used to measure deviations of prices from the average. This means that they have the potential to change whenever there is an increase of decrease in price fluctuations. When there is an increase in volatility, it is usually an indication of the setting of new normals, giving traders a chance to capitalize with Bollinger bands.
Sometimes, Bollinger bands can converge on moving average as an indication of low price volatility. This is referred to as ‘the squeeze’. It is a reliable Bollinger bands signal commonly used in forex trading. For instance, in 2014, a market squeeze was observed on a USD/JPY pair. The change of trend was caused by news about a possible increase in the Bank of Japan’s stimulus buying policy. Even without hearing this news, any trader using Bollinger bands would have noticed the squeeze.
Having a backup plan
Sometimes in forex trading, the market reactions are mild. During this period, traders can easily miss profits because they directly set their orders on the lower or upper Bollinger band levels.
To avoid disappointment, it is always advisable to also determine your trade entry and exit points close to these levels. Alternatively, traders can add another Bollinger band set from the moving average standard deviation to create lower and upper channels. Buy and sell orders can be placed in the lower and upper zones, respectively, to increase execution probability.
Other trading tools like the Pure Fade Trade and the Inside Day Bollinger Band Turn Trade can be used alongside Bollinger bands. To use these tools successfully, traders need to follow structured methods to the letter for the strategy to work out.
Bollinger tools are useful forex trading tools for any trader interested in assessing price volatility related to their position. It gives traders insight into the best times to enter or exit trade positions, therefore maximizing profits.
Whether you are adding a second Bollinger bands set or using the squeeze aspect to trade, using the Bollinger bands tool correctly makes it easier for you to make an informed decision for your trade and hopefully profits.